Financial Standard Volume 18 Number 09

www.financialstandard.com.au

11 May 2020 | Volume 18 Number 09

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Capital Group

Pendal, UniSuper, Statewide Super

Investments

Feature:

Profile:

Publisher’s forum:

10

Opinion: Jonathan Steffanoni QMV

In 2019 alone, we paid $1.5 billion in claims.

Executive appts:

Featurette:

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Health and wellbeing

Matt Rady Allianz Retire+

Fidelity International is proud to be awarded the 2020 Morningstar Australia Fund Manager of the Year.

The award recognises Fidelity’s consistently high-performing investments and our ability to serve as first class stewards of our investors’ capital over the long-term.

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Learn more at fidelity.com.au/why-fidelity Morningstar Awards 2020 ©. Morningstar, Inc. All Rights Reserved. Awarded to Fidelity International for 2020 Morningstar Australia Fund Manager of the Year.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters and seek independent financial advice before acting on the information. This document may not be reproduced or transmitted without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. © 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

www.financialstandard.com.au

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Capital Group

Pendal, UniSuper, Statewide Super

Investments

Feature:

Profile:

Publisher’s forum:

10

Opinion: Jonathan Steffanoni QMV

The quest for income Ally Selby

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s many widely-held companies, including the big four banks, cut or defer dividends in the wake of COVID-19 and interest rates remain at record lows, investors – retirees, in particular – are set to be hardest hit.

Since the GFC, the RBA’s official cash rate has dived from 7.25% to 0.25%, with investors moving up the risk spectrum in their quest for yield. Their fear of missing out saw them pile into risk assets and now the consequences are being felt.

“This is where arguably the COVID-19 impact on equity markets has hit hard for many retirees, on top of the impact and worry delivered to their capital with share prices being smashed,” Bennelong Funds Management research relationships director, Stuart Fechner says.

“Many companies have now either cut, deferred or are not paying an upcoming dividend and this hurts retirees big-time.”

It is also unlikely that interest rates will be going up anytime soon.

“Hence cash deposit rates and bank term deposits, that many retirees have utilised for income purposes, won’t be going up to help them out for quite some time,” Fechner explains.

Investors reliant on yield now have to choose between the lesser of two evils, Schroders fixed income and multi asset portfolio manager Mihkel Kase argues.

“Getting a reasonable level of risk free income at the moment is very difficult; investors can either acccept the very low level of income and draw down on their capital, or they can probably put more capital at risk to earn higher levels of income,” he says.

He argues investors should remain defensively positioned and liquid over the coming weeks and months, and revealed he currently has a 60% exposure towards investment grade credit and a 27% weighting to cash.

“Investment grade credit is not going to give you a great return, but if you can avoid defaults through active management, then it will provide you with coupon payments and your capital back at the end,” Kase says.

Similarly, Aberdeen Standard Investments head of Australian fixed income Garreth Innes says investment grade corporate bonds are the pick of the bunch.

“As a corporate bond investor, you sit higher up in the capital structure and benefit when chief financial officers scrap the dividend as there is more money left over to

pay bond coupons and refinance,” he says.

“Credit spreads are at relatively elevated levels compared with the last five years so there is an opportunity here relative to risk assets, which have bounced quite aggressively over the last few weeks.”

JP Morgan Asset Management global market strategist Kerry Craig also believes there are still opportunities for income in the current environment.

“Income is still out there, but just requires looking a little harder and ensuring that investors do not add unwanted macro risks to portfolios in the search for yield,” he says.

Although he says investment grade credit can provide liquidity, he warns investors need to discern the companies that will survive the crisis – as well as those that won’t.

“Similarly, for equity dividends, a careful analysis needs to be made of whether dividends are sustainable or are paid to keep investors interested in their stock,” he says.

He also likes real assets, like infrastructure or transport, which can offer much higher yield than that available in public markets (although these are relatively illiquid).

However, GSFM chief executive Damien McIntyre says bonds are not the answer.

“You are not going to get income through bonds - bond yields have been driven lower by demographic challenges, benign inflation, hyper aggressive central banks and elevated policy uncertainty - it is going to have to be through equities,” he says.

Butnot all equity yields are created equal and a high yield could be the product of a one-time windfall or a collapsing stock price.

“Using detailed fundamental research to identify quality yield — dividends that are sustainable and growing — can help reduce this risk,” McIntyre says.

Tech and healthcare sectors are “virtually recession proof”, he adds, but warns investors should steer clear of financials and consumer discretionaries.

The thing to remember right now though is it’s not so much about the type of asset that provides higher yield, but how sustainable that yield actually is.

“Investors need to determine whether or not a company is financially sound and has the wherewithal to last through a crisis,” Fechner says.

If not, it’s only a matter of time before the company doesn’t exist and won’t be paying income or a dividend of any kind, he warns. fs

11 May 2020 | Volume 18 Number 09 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Executive appts:

Featurette:

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Health and wellbeing

Matt Rady Allianz Retire+

500 advisers exit during COVID-19 Elizabeth McArthur

Damien McIntyre

chief executive GSFM

Rainmaker analysis of the ASIC Financial Adviser Register shows that just shy of 500 financial advisers have left the industry since COVID-19 hit.

From 27 February 2020 to 23 April 2020 the ASIC FAR dropped from 23,226 advisers (excluding time share advisers and duplicate entries) to 22,733 advisers – a total of 493 gone.

Even more have left the industry, Rainmaker analysis indicates, as there were some new entries to the ASIC FAR in the same period.

The shuttering of Financial Wisdom lost 83 advisers in the time period, with just six left holding on.

Suncorp Financial Services went from 20 advisers to three. AMP lost 37 advisers.

Ausure went from 47 advisers to just 11, while the SMSF Adviser Network lost 25.

GWM Adviser Services lost 24 advisers, going from 329 to 305.

Charter Financial and National Australia Bank lost 19 advisers each.

Consilium, which had picked up a number of Continued on page 4

Asset consultant expands offering Eliza Bavin

One of the country’s largest asset consultant has entered the market for the provision of managed account services to financial advice and private wealth practices.

JANA said it will be expanding its service offering to financial advice and private wealth firms in response to the needs of the “growing and evolving” sector.

Speaking with Financial Standard JANA chief executive Jim Lamborn said the move is in response to a growing demand in the market.

“Our focus for 32 years has been exclusively institutional grade, but we then realised there was a whole market segment out there that was a natural growth area for us to look at,” Lamborn said.

“We have also seen the evolution of that marketplace and the importance of good governance and of non-conflicted business models.”

JANA said it will draw on its advisory and implemented consulting expertise to offer managed account and consulting services Continued on page 4

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News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Westpac to review key business units

Editorial

Jamie Williamson

Jamie Williamson

W

Editor

If there’s one thing the government’s early release of super scheme has demonstrated, it’s that many Australians really don’t understand how tall of an ask bringing something like this about is.

Commencing on April 20, the scheme is being effectively run by the Australian Tax Office which is verifying requests and passing on applications to the respective superannuation fund. The fund then has five business days to cross-check and meet the request.

Note, the five-day rule was expected to apply in the “vast majority of cases”.

On the Monday that the scheme opened, an ATO spokesperson told Financial Standard more than 880,000 people had registered their intention to apply – many Australians legitimately experiencing financial hardship as a result of COVID-19 and many, according to Industry Super Australia, who didn’t or don’t actually need to make the withdrawal.

Assuming it took the ATO two business days to work its way through even a quarter of the applications that actually came through on that first day, the super funds then had from, say, midday Wednesday to do its part and release the cash to members.

Five business days means a deadline of midday Wednesday the following week.

It’s no mean feat, particularly given funds have apparently had to wade through quite a number of fraudulent claims. And let’s not forget the delays that can often occur when transferring between bank accounts, particularly for the first time.

It therefore strikes me as somewhat of a cheap shot that we then had major metropolitan newspapers running articles on the delays members were facing no sooner than that Wednesday night.

A member mentioned in one of the stories had done just as above – applied on April 20 and was apparently still waiting on Wednesday evening, or at least that’s what the time stamp on the article suggests.

Funds are also copping it on social media, with members threatening to switch funds if the money isn’t released to them momentarily.

According to APRA stats, the first week of the scheme saw just shy of 665,500 applications received by funds, and about 163,000 of those were processed that week.

The stats show the average time taken by a super fund to release a member’s money to them has so far been 1.6 days.

Obviously that means that some could have been left waiting longer, but when you consider the legacy systems super funds and their administrators are dealing with and the fact that much of the work cannot simply be automated, even a five-day turnaround would be impressive. And that’s ignoring the fact almost everyone in the industry is working remotely.

I don’t doubt there are funds that are taking longer to fulfil requests, whether it’s simply an issue of manpower or a genuine issue with liquidity, but I also don’t believe all the bashing is entirely necessary.

This is an unprecedented scheme in unprecedented times and accessing money that has been invested for the long-term isn’t as easy as smashing open a piggy bank. fs

The quote

We have several businesses where we don’t have sufficient scale or where the returns are insufficient for the risk.

estpac has determined several of its business units lack sufficient scale, including superannuation and investments, and is set to launch a review aimed at simplifying the group.

Westpac said it is establishing a new specialist businesses division, appointing former chief executive of Commonwealth Bank’s NewCo Jason Yetton to lead the unit, effective May 18.

In determining immediate priorities, Westpac chief executive Peter King said the group is looking to focus on its Australian and New Zealand banking businesses.

“We have several businesses where we don’t have sufficient scale or where the returns are insufficient for the risk,” he said.

These include wealth platforms, superannuation and retirement products, investments, and general and life insurance and auto finance, he added. It will also include Westpac Pacific.

“The changes today are a significant step to reducing the complexity of our portfolio and will allow the group executives to focus on

improving performance in our Australian and New Zealand banking businesses,” King said.

The news comes as the group reported statutory profits dropped 62% year on year.

Its cash earnings are down $993 million, or 70%, compared to 1H19.

This is due in part to an impairment charge of $2.2 billion, including $1.9 billion to account for the potential impact of COVID-19 and other costs associated with the ongoing AUSTRAC matter, for which it has provisioned $900 million for a possible penalty.

As a result, Westpac has decided to defer its interim dividend decision. The group told shareholders it was a difficult decision but will see how things pan out economically over the next six months.

The group also booked an after-tax cost of $258 million for remediation in the first half. This included the estimated compensation for customers on the group’s platforms that weren’t informed of certain corporate actions and refunds to clients of BT Financial Group whose wealth fees were inadequately disclosed. fs

More super funds will merge: QMV Elizabeth McArthur

COVID-19 will be the shove that forces some superannuation funds to merge, while others thought safe prior to the pandemic will also be left pondering consolidation.

According to QMV practice lead Anthony Forbes, there are certain funds that are going to be hit hardest by the fallout of COVID-19.

He identified them as funds that are specific to the industries and sectors that have been hardest hit by the COVID-19 lockdown restrictions - for example travel, airlines or hospitality.

In these industries where so many have been made unemployed, super funds without diversified member bases will face several problems at once - they will lose SG contributions, have fewer new members joining and have a large number of members withdrawing funds due to financial hardship.

This is one of the reasons Forbes thinks merger activity is about to heat up.

“I think those funds without a broad range of industries or employers contributing will be the most impacted,” Forbes told Financial Standard.

“They could be on either side of the merger, they may want to merge to consolidate their position and introduce members from other sectors or they could have been hit hard and may be strug-gling to continue.”

Forbes said with Sunsuper and QSuper in merger talks along with VicSuper and First State Super, the consolidation that has been happening over decades was already coming to a peak before COVID-19 hit.

“If Sunsuper and QSuper merge they’ll be bigger than AustralianSuper. It almost starts to get to the point where you say, do we have enough competition? We’re a fair way from really having to worry about that but what we will have is two behemoths,” Forbes said.

“We’ve got a whole lot of much, much smaller boutique style funds and there’s no doubt that these mergers have created operational efficiencies. It’s too hard for small funds to handle a lot of this constant legislative change.”

Forbes said larger funds are much better placed to handle the pace of legislative change that super funds have experienced over the last 10 years.

“COVID-19 really just adds another consideration for those smaller funds to ask whether they have the scale to compete,” Forbes said.

“A lot of funds, if they haven’t already been talking about merging, COVID-19 will push it up the agenda.”

Treasurer Josh Frydenberg has pointed out that APRA does have the ability to direct super funds to merge, and has implied that this could be the outcome for funds who fail to show efficien cy on early release demand.

The possibility that funds could be forced to merge, Forbes acknowledged, is less than ideal.

He pointed out that regulators and government may have been frustrated by mergers that have been flagged in the past but never eventuated.

“The reason for that, in my view, has often been about the merging of the boards. There’s been a lot of politics around mergers that has sometimes gotten in the way and I think that’s been quite frustrating to government and regulators,” Forbes said.

“Being proactive about merger talks is a better outcome than having it imposed on you by the government or by a bigger fund, where it becomes more of a takeover than a merger.” fs

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News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

01: Mark Delaney

500 advisers exit during COVID-19

chief investment officer AustralianSuper

Continued from page 1 Dover and Spectrum advisers after the shuttering of those AFSLs following regulatory action, lost seven advisers. It is now down to 39 from 46 in February.

Paul Tynan, chief executive of Connect Financial Services, was not surprised to see almost 500 advisers leaving the industry in less than two months.

“There’s going to be more,” Tynan said.

“It’s the over-regulation. You’ve got the regulation from ASIC, then you’ve got FASEA, then you’ve got the dealer groups and the institutions. People are being strangled by bureaucracy and red tape.”

Tynan predicts that the ASIC FAR will get as low as 15,000 registered financial advisers as people are pushed out of the industry by red tape, with COVID-19 only adding to the burden.

“We will have 15,000 financial advisers looking after 25 million people,” he said.

COVID-19 and the economic havoc it has brought has resulted in demand for advice, Tynan said, but he also thinks the pandemic could be “another nail in the coffin” for the industry.

“The demand is there. People want advice,” Tynan said.

“But in Australia we have made advice unscalable and unaffordable.”

The government’s regulatory relief, Tynan said, doesn’t change the fact that advisers know their careers are on the line when they advise about the early release of superannuation.

“It’s not worth the $300,” Tynan said.

“It’s not just the Statement of Advice, it’s everything. It’s so hard…. And it’s harder for people in the country and in regional Australia.”

However, Tynan did say there has been a silver lining in the COVID-19 crisis for some financial advisers who have seen clients more engaged and new technology like video meetings boosting productivity. fs

Superannuation investment chiefs defend illiquid assets Elizabeth McArthur

F The quote

We don’t think that portfolio construction, investment strategy or risk management actually changes because of COVID-19.

Asset consultant expands offering Continued from page 1 to high quality financial advice and private wealth practices.

Michael Karagianis has been selected to lead the roll out of JANA’s retail partnerships offering.

Karagianis joined JANA in January 2019 as senior consultant and he will be supported

by John Ryan, who has joined as business development lead for retail partnerships.

“At present the advisor focussed consulting market is highly fragmented with a wide range of players ranging from individual consultants through to boutiques to larger institutionally owned consulting firms,” Karagianis said.

“Not all of these are likely to survive moving forward. JANA has a unique blend of the culture of a boutique consultancy business but with the strength of its institutional presence and balance sheet.”

Karagianis told Financial Standard JANA has been engaged with Melbourne-based Strategic Wealth for around 12 months and more recently entered a partnership with Queensland-based First Point.

Karagianis said the two engagements, which have been set up differently, are evidence of the flexible approach JANA is taking.

“We are being flexible in the way we engage with this market,” Karagianis said. fs

ollowing weeks of scrutiny over potential liquidity issues facing super funds, the chief investment officers from AustralianSuper, First State Super, LGIAsuper, MLC, QSuper, Sunsuper, TelstraSuper and QIC – representing around $600 billion in assets for more than 6.5 million members – appeared in the QIC webinar to set the record straight.

AustralianSuper chief investment officer Mark Delaney01 said the idea that super funds do not have the liquidity to meet the early release demands brought about by financial hardship during COVID-19 is a “furphy”.

“I don’t think the super system has got too many illiquid assets. So I think that’s a furphy,” he said.

“Most of them would have two thirds of their portfolio in liquid assets and most of the money won’t be accessible for a long time. So the idea they’ve got too much I think is wrong.”

Delaney argued that COVID-19 was not that unusual of an event, when stripped down to economic basics.

He cited work from Deutsche Bank chief economist Torsten Slok who noted that the US has had a recession every decade since 1770.

“The trigger is unusual, but having a recession and a bear market in stocks is part and parcel of what we all live with,” Delaney said.

“And for people who’ve got money in superannuation, they’ll have it through five or six bear markets over their lifespan. So to go into panic mode every time one of these happens is a ridiculous idea.”

However, Delaney did say he would be looking at AustralianSuper’s holdings in office buildings after COVID-19.

“There’s a whole bunch of CBD buildings that are currently unoccupied,” he said.

“Will people need that same allocation of CBD office space in five years’ time if we start getting very comfortable with the idea of people sitting on Zoom meetings and working at home?

I don’t think we’re talking enough about that.”

Meanwhile, TelstraSuper chief investment officer Graeme Miller remains bullish on unlisted assets, saying they generate greater returns over the long term.

He stressed there was no single, ideal allocation to any risk premium for a particular portfolio, with a fund’s demographics a key deciding factor.

Miller argued that equity prices were not demonstrating rational valuations in the current environment.

“We’ve just seen the market plunge by 38% and then rise by 27%, and to put that up as a poster child of this is sort of cogent, rational valuation of future cash flow streams, I think is a notion that then in fact can be challenged,” he said.

LGIAsuper chief investment officer Troy Rieck agreed that COVID-19 isn’t really going to change the way super funds invest.

“We don’t think that portfolio construction, investment strategy or risk management actually changes because of COVID-19,” he said.

Rather, Rieck said, COVID-19 is a valuable lesson on the importance of understanding risk.

“Risk management in particular is the one thing that you have to know really well to make sure you survive short term events like COVID-19 - and I will call it a short term event in a context of 30 to 50 year investment strategies,” he said.

Rieck argued illiquidity is one of those risks, and that liquidity was always important. He slammed those who see no point in holding cash. fs

MySuper bounces back Harrison Worley

While the fallout from the COVID-19 pandemic has demolished the return expectations of investors for the year, new analysis shows MySuper products have managed to turn things around.

Latest Rainmaker research shows MySuper products offered by not-for-profit funds are performing strongly in the wake of COVID-19, with Rainmaker’s SelectingSuper MySuper index recording an average return of 2.2% across April.

The April monthly result is the best since June last year, and shows that despite facing extreme difficulties, MySuper have successfully shielded their members from much of the crisis’ worst impacts.

The results bring the average fall in the MySuper sector to -10% since the onset of the Corona Financial Crisis on 20 February.

Rainmaker’s advance SelectingSuper index is based on an

analysis of 20 MySuper products offered by not-for-profit super funds which publish daily unit prices. Products in the index represent $522 billion being around two thirds of the MySuper sector.

Returns across the index ranged from a high of 4.1% to a low of 0%. No MySuper product in the index recorded a negative result for the month.

Overall, rolling 12 month returns for the index are tracking at around -3.2%, the lowest level since August 2009. Financial year to date returns are now averaging -4.8%. However, the results pale in comparison to the troubles suffered during the worst of the GFC, when the MySuper 12-month index dropped all the way to -21% in December 2008.

Rainmaker said the strong April performance is influenced by gains in the ASX of 8.8%, and the positive performance of AREITS, which posted 13.7%. fs

News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Adviser bans fall ASIC has revealed adviser bans dropped by more than half in the second half of 2019, from 103 to 48.

The figures were released in the regulator’s half yearly ASIC Enforcement Update along with an outline of its enforcement strategy for 2020.

However, ASIC recalibrated its regulatory priorities in mid-April to focus on challenges created by the COVID-19 crisis and any highly significant or urgent matters.

ASIC deputy chair Daniel Crennan said: “Our enforcement work will continue, however some of that work will also be delayed or affected by the crisis.”

“We are committed to performing our work in a manner that is considerate to industry participants who may be facing significant disruption.”

ASIC said in the six months between July 1 and 31 December2019, it recorded 55 financial services related results.

Additionally, as at 1 January 2020, ASIC had 14 criminal and 58 civil financial services related matters still before the courts.

Crennan said ASIC has worked on developing its enforcement strategy and priorities for 2019–21 and increase its capacity to investigate market, corporate and financial sector misconduct.

The regulator said it has also focused on using its additional resources to take on more enforcement work and made very significant progress in responding to matters related to the Royal Commission.

“As I have emphasised over the past year, ASIC has a clear resolve and... is delivering on the public’s expectation that we hold wrongdoers to account,” Crennan said. fs

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01: Renato Mota

chief executive IOOF

IOOF sees surge in FUM Eliza Bavin

I The quote

Scale, economic diversity and business resilience are important contributors to the success of our business transformation.

OOF said it recorded net outflows of $262 million from its financial advice practice, but this was due to an ex-ANZ aligned dealer group off-boarding during the quarter.

The company said excluding that one-off movement its net inflows were positive.

IOOF chief executive Renato Mota01 said during the COVID-19 uncertainty it was reassuring to see the positive work its advisers were doing.

“These COVID-19 related challenges are on top of the existing industry transformation, and it’s been pleasing to see advisers recognise the support being provided by IOOF in these unprecedented times,” Mota said.

Mota added that since the onset of COVID-19 restrictions and impacts in Australia IOOF has been a surge in demand for financial advice and information.

“Clients are naturally concerned, and somewhat overwhelmed with the swift

changes that have taken place,” Mota said.

“Guided by financial advisers, they seem to be taking a pragmatic and long-term view of their investments.”

IOOF’s investment management business saw outflows of $81 million, with Mota saying despite its MultiSeries, MultiMix fixed interest and cash management trusts seeing net inflows, it was not enough to offset losses in its other investment products.

The addition of the P&I business brought $77.1 billion of addition FUM during the quarter.

“Scale, economic diversity and business resilience are important contributors to the success of our business transformation,” Mota said.

“The outflow profile has been a historical constant and while it is early days under IOOF ownership, we continue to see opportunities to simplify the combined businesses to drive efficiencies; improving outcomes for members, clients and shareholders.” fs

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News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Risk advisers under fire

01: Francesco De Ferrari

chief executive AMP

Elizabeth McArthur

The recent joint report from ASIC and APRA into life insurance and claims handling found superior consumer outcomes for group life insurance, leading a prolific law firm to suggest risk advisers add little to no value.

Maurice Blackburn superannuation and insurance principal Josh Mennen said the report did not find favourably for life insurance policies recommended by financial advisers.

“This report has some very compelling data that makes clear that group insurance through super remains a crucial product that delivers significantly greater value for consumers than other policies, including those supposedly tailored by financial advisers,” Mennen said.

The data indicated that the claims paid ratio for group total and permanent disability insurance was 85%, compared to 45% on retail policies.

“It also shows that income protection through super led to just 33.7 disputes per 100,000 people insured, compared to retail income protection policies, which came in at a staggering 150.5 disputes per 100,000 people insured,” Mennen said.

“This reinforces that while adviser-sold policies are often marketed as a bespoke product, too often they are compromised by conflicts of interest, including insurers paying trailing commissions that result in poor product selection and claim disputes caused by underwriting complications.”

Kennen went so far as to say that the financial advice industry will have to justify how consumers could be better off consulting a risk adviser in light of the data. fs

Relief for SMSFs Eliza Bavin

SMSFs have been granted an extension to the lodgement of annual returns to the ATO to June.

The ATO said it made the decision in the wake of the financial effects of the COVID-19 outbreak.

“The requirement for an SMSF to appoint an auditor 45 days before lodgement of their annual return will place pressure on SMSFs to meet upcoming lodgement deadlines,” it said.

“To help, we are automatically applying a deferral for the lodgement of 2019 SMSF annual returns due on 15 May and 5 June 2020 until 30 June 2020.”

The SMSF Association welcomed the decision and said it is evidence that the ATO is taking a flexible approach to issues during the COVID-19 crisis.

SMSFA chief executive John Maroney said the association has been working constructively with the ATO to find solutions for SMSFs affected by economic ramifications of social distancing measures and extreme market volatility.

He said he has been in discussions with ATO commissioner Chris Jordan and SMSF assistant commissioner Dana Fleming. “[The discussions] have been extremely fruitful, allowing us to work through numerous issues since the COVID-19 public health crisis erupted in March,” Maroney said.

“What’s been extremely pleasing is the positive approach of the ATO on these issues.”

“There is a realisation that these difficult times require pragmatic solutions that might not be in strict accordance with the legislation.” fs

AMP bleeds $18bn Harrison Worley

T The quote

During this time of uncertainty, we have focused on supporting our clients whilst working to continue to execute on our strategy. execute on our strategy.

he market damage of COVID-19 saw AMP’s wealth management arm shed more than $18 billion during the first quarter.

COVID-19 has left AMP around $18 billion shorter than it was at the beginning of the year, with the economic impact of the pandemic hitting the firm hard.

Releasing its quarterly assets under management figures, AMP revealed its Australian wealth management arm is now managing just over $116 billion.

At the end of the last quarter the firm was managing around $134 billion.

However, not all of AMP’s performance can be put down to the pandemic. All told, almost $2 billion walked out the door during the first quarter, including around $430 million in corporate superannuation mandates. Additionally, $205 million was written off as impacts from the implementation of the government’s Protecting Your Super legislation.

Even when taken without those impacts, AMP’s Australian wealth management arm still suffered to the tune of $1.3 billion across the first quarter.

It isn’t all bad news for the wealth manager however. About $1.1 billion more in cash flowed into its wealth arm than this time last year, which it said was largely thanks to its flagship wealth platform, North, which took on $400 mil-

lion in funds from external financial advisers.

AMP Capital saw its average assets under management for the quarter increase by about $700 million, despite ending it with $10.7 billion less in assets under management. The division’s net external cashflows increased to $1.3 billion from net cash outflows of $20 million in the prior corresponding period, which AMP said was due to strong inflows into fixed income products managed by China Life AMP Asset Management.

AMP chief executive Francesco De Ferrari01 said he was pleased the wealth manager was “showing up strongly” for its clients despite the uncertainty, which he said demonstrated the resilience of the business.

“During this time of uncertainty, we have focused on supporting our clients whilst working to continue to execute on our strategy,” De Ferrari said.

“We’re responding to a record level of client enquiries for advice and support as people weigh up important financial decisions.

“Markets in quarter one were extremely volatile particularly in March, with significant falls in equities, fixed income and key commodities impacting our assets under management. We have seen some recovery since the quarter-end, but expect market volatility to continue and the economic impact of the pandemic to emerge over the remainder of the year.” fs

Members begin to turn on industry superannuation funds New customer satisfaction data shows members’ opinions of industry superannuation funds are starting to turn, after weeks of scrutiny over their performance during the COVID-19 crisis.

According to Roy Morgan’s latest superannuation customer satisfaction findings, member satisfaction with industry funds feel a “significant” 1.1% from February to March, landing at a customer satisfaction score of 64.4%.

In contrast, public sector funds added 0.3% to their February result to sit at 74.5% customer satisfaction, just 0.5% behind self-managed super funds, which also gained 0.3%. Retail funds suffered too, but to a lesser extent, losing just 0.2% to sit at 60% customer satisfaction in March.

Roy Morgan chief executive said the findings - taken from the firm’s Single Source survey of consumers - point to the pressures on industry funds, particularly their exposure to the COVID19 crisis from both investment and regulatory perspectives.

“In the last month the concern for industry funds and retail funds in particular is about how many

Australians will take up the federal government’s $20,000 super fund withdrawal option over the next six months,” Levine said.

“Industry funds based on employees in hospitality and retail industries are particularly exposed to this policy as many of their workers have been stood down in recent weeks as Australia fights the COVID-19 coronavirus pandemic.

“A majority of industry funds had declining month-on-month satisfaction in March and the challenge for all superannuation funds going forward will be finding ways to maintain customer satisfaction amid trying market conditions, reduced returns and ongoing uncertainty.”

Levine said that while the short term performance of industry funds was negative, long-term customer satisfaction levels had risen across the sector.

“The average satisfaction rating across all superannuation funds is 64.2% in March, a 3.4% increase from a year ago. However, this annual comparison misses a fall of 0.6% in the month of March after the ASX200 market peaked in late February,” she pointed out. fs

News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Sargon sale confirmed Kanika Sood

Sargon’s Diversa, CCSL and Tidswell businesses will be owned by New York-based buyers, who are committing to retaining Aussie jobs and have hired a Westpac and BT veteran for the board.

New Yorker Teddy Wasserman of CloverHill Capital and Australian-origin Matthew Kibble of Kibble Holdings LLC are joined by Vista Credit Partners (who is also providing the financing) as joint equity investor.

APRA and Foreign Investments Review Board (FIRB) have given the green light to the three entities to take over Diversa, CCSL and Tidswell.

The acquisition was completed this month and done through a new entity called the Pacific Infrastructure Partners (PIP) which was registered with ASIC as a proprietary company in early April.

Former PEXA chief Marcus Price is acting as a strategic adviser to PIP, as first reported by Financial Standard.

“PIP is finalising the appointment of a new chief executive and is in the process of identifying and appointing an independent chairman as part of further plans to strengthen governance,” it said.

“We have appreciated the significant efforts and professionalism of FIRB to expedite the transaction and preserve close to 100 Australian jobs. It is pleasing that our intentions to protect and steward the Sargon businesses have also been recognised by regulators including APRA. PIP is committed to delivering the highest of standards for all stakeholders, including our clients and members,” Kibble said. fs

01: Name here

deputy chair APRA

xxxxx xxx xx xxx xx x xxx xx xx xx

Super funds release $1.3bn Eliza Bavin

A The numbers

665,310 Number of applications for early access to super received by super funds in the first week.

Super fund delays transfer A retail superannuation fund has postponed its MySuper transition to a $16.5 billion industry fund citing market uncertainty and volatility arising from COVID-19.

Perpetual’s MySuper product was to transition to CareSuper effective around May 1 as its inflows slowed down significantly during FY19 and fiveyear performance slipped, Financial Standard first reported March 20.

However, at the end of that month, COVID-19 put a halt to the successor fund transfer plans.

“Due to the market volatility and uncertainty caused by COVID-19, Perpetual Superannuation Limited (the Trustee), has decided to postpone the transfer until later in the calendar year,” Perpetual said in a statement to members.

“This decision was made to protect the superannuation benefits of members from the increased risks of undertaking a transfer in the current market environment.”

A spokesperson confirmed this morning that the trustee has not yet set a new date for transfer.

Perpetual MySuper ranked 21st for one-year returns to June 2019, however it sits in 52nd place over five years. For comparison, CareSuper is ranked 11th over five years, according to Rainmaker data.

Perpetual is not the only trustee to delay a successor fund transfer of late.

In March, Tasplan and MTAA Super, who committed to a merger late last year, moved back the date of the merger from 1 October 2020 to 31 March 2021, citing COVID-19. fs

01: Helen Rowell

7

PRA has released the first Early Release Super (ERS) figures, showing $1.3 billion has been paid to members in the first week of the scheme.

Under APRA’s Early Release Initiative (ERI) data collection, superannuation trustees were asked to submit data on a weekly basis covering the number and value of early release benefits paid to members and the processing times of those payments.

The regulator said all 167 funds that it requested data from regarding early release payments provided it, however mentioned that not all funds received applications from the ATO. The initial ERI publication shows that in the first week of the ERS scheme, super trustees received 665,310 applications for early release, processed 162,879 of those applications; and paid members $1.3 billion.

APRA said the average benefit paid was $8002.

“For applications paid in the first week of the scheme, trustees took an average of 1.6 days to make payments to eligible members after receipt of their applications from the ATO,” APRA said.

“Given this was the first week of the early release initiative, trustees had no applications that were more than five business days old.”

APRA deputy chair Helen Rowell01 said the

data collection enables APRA, the government and other stakeholders to monitor the take-up of the new scheme, and ensure trustees are processing eligible applications in a timely manner.

“Although this publication only covers the first week of a scheme that will run for several months, the initial data indicates trustees are moving quickly to make payments after receiving determinations from the ATO,” Rowell said.

“Under the Superannuation Industry (Supervision) Act 1993, trustees are legally required to make early release payments to eligible members ‘as soon as practicable’.”

Rowell said APRA expects trustees should be able to make the payments within five business days, however, recognises it may not be practicable in all cases.

Rowell said processes may be slower as trustees conduct fraud checks, and fulfil their legal obligation to look out for the best interests of all fund members.

“APRA is closely monitoring trustee performance in this area and will consider taking appropriate action if evidence emerges of funds not releasing benefits to eligible members as soon as practicable,” Rowell said.

APRA said it intends to publish updated data every Monday, and will expand the publication next week to include fund-level data. fs

Liquidity, unlisted asset debates may harm super Harrison Worley

Rice Warner is concerned the media and government’s criticism of super fund liquidity management plans may cause gun-shy funds to hold more money in cash in the future, thereby harming the returns earned by members.

Referring to the impact of the government’s Early Release Scheme, Rice Warner said super funds trustee boards were “essentially” being berated for not having provided for the sovereign risk of the government requiring cash withdrawals well outside their own enunciated (but not yet legislated) Objective of Superannuation”.

While it said most funds will manage members requests for cash, the researcher noted those responsible for the retirement savings of workers in industries heavily impacted by the pandemic will be hit - and it won’t be their fault, as had been suggested by the government, including Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume.

According to Hume, funds claiming they cannot meet the liquidity demands of the government’s ERS initiative have had “a collective failure of imagination”.

However Rice Warner disagreed with the Assistant Minsiter, and said the circumstances pushing some funds into trouble couldn’t have been predicted.

“As JobKeeper does not allow for any superannuation contributions, the regular cash flow has been severely disrupted,” Rice Warner said.

“None of this could have been foreseen!”

Rice Warner said heavily impacted funds may need to sell one assets to support cash flows, which may mean locking in lower prices given the value of some assets – particularly unlisted assets – have dropped.

“Not only does this mean selling at depressed prices, but it reduces the scope to buy other discounted assets as they become available. Fortunately, we are not aware of any funds that will need to ask APRA for approval to cease rollovers due to illiquidity (Section 6.36 of the SIS Act),” Rice Warner said.

The firm said one of the implications of the Early Release scheme is that funds “will hold more money in cash”, on which very little will be earned.

“They will be worried that this precedent could be repeated, and they need to be better prepared. Superannuation funds with a significant proportion of members in those industries most affected at the moment (such as hospitality, retail and tourism) may seek to attract more members in other areas as well as building up membership of their account-based pensions,” the firm said.

“This will provide an increased buffer against another one of these (hopefully) one-in-a-hundred-year events.”

With funds set to experience a tougher decade than the preceding two, Rice Warner said earning targets may need to be set. Doing so will mean communicating those new projections to members which may undermine confidence in the system, “despite its clear value for most Australians”. fs

8

News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

National advice firm rebrands

01: Dave Rae

financial adviser Federation Financial Services

Eliza Bavin

Mortgage Choice has announced the rebranding of its financial advice division from Mortgage Choice Financial Planning to FinChoice.

Mortgage Choice chief executive Susan Mitchell said the decision came after a strategic review of the company’s brand proposition.

“We decided that it was important for there to be a clear distinction to consumers between the offering of our financial advice and mortgage broking divisions,” Mitchell said.

“The rebrand demonstrates our continued commitment to financial advice and is part of our strategy to drive growth in our advice practices and deliver advice to more Australians.”

FinChoice chief advice officer Dean Thomas said the rebrand will help cement the distinct identity while still demonstrating it is connected to the Mortgage Choice brand.

“While the FinChoice name is new, our mission remains the same,” Thomas said.

“FinChoice’s purpose is to make advice accessible to all Australians and to offer relevant advice at the time they need it most regardless of a person’s age or life stage.”

Thomas added that financial advice is changing and FinChoice wants to be at the forefront in the “new era” of advice.

“We set up our licence model in 2012 to be sustainable and adaptable to change,” he said. fs

Custody mandate pipeline clogs The biggest custody businesses are experiencing delays in implementing new mandates, as volatility makes clients hesitant to switch.

During Northern Trust’s 2020 first quarter earnings announcement chief executive Mike O’Grady acknowledged that newly won custody mandates were experiencing delays.

He said that with businesses in work from home mode, new clients have told Northern Trust they want to move their transition back to later in the year.

Winning new business has taken a hit too, he admitted.

“What about new business activity where you’re in the process of winning? Yes. There’s some slowdown in mandate-type decisions,” O’Grady said.

Listed platform Xplore Wealth recently delayed its transition to J.P. Morgan until 1 May 2020.

Xplore currently uses multiple custodians and the switch to J.P. Morgan is part of its One Platform strategic plan.

The platform said its decision to delay the deal with J.P. Morgan was down to market volatility.

However, work from home protocols are also an issue for custodians.

Insights from law firm Allens Linklaters on the impact of COVID-19 on investment funds found: “A custodian that is usually able to carry out an instruction to sign an agreement may be less able to do so when its authorised signatories are working from home.”

The law firm advised that responsible entities and trustees should be aware that third party processes may be interrupted as a result of the pandemic and efforts to slow its spread. fs

FASEA too soft on ethical investing: Advisers Elizabeth McArthur

D The quote

I don’t see how you can consider the preferences of your client without expressly asking those questions.

uring a Responsible Investment Association of Australasia webinar some financial advisers have suggested that FASEA’s Code of Ethics doesn’t go far enough on ethical investing.

Appearing on the webinar, Federation Financial Services adviser Dave Rae 01 pointed to an example provided along with the FASEA Code of Ethics’ Standard 6.

In the Code of Ethics Guidance, released by FASEA in October 2019, this example was given: “Where your clients indicate they only wish to invest in ethical or responsible investments, you will need to consider whether limiting your product recommendations in this manner is appropriate.”

“My reading of it was that you should be understanding the preferences of your client,” Rae said.

“As advisers, we understand how important it is to know your client and part of that is understanding their preferences when it comes to money or investments.”

Rae said FASEA’s first explanatory statement on the code seemed to suggest that advisers may have to limit their advice to responsible investments if the client expressed such a preference.

However, further guidance from FASEA indicated the reference to responsible and ethical investments actually demanded advisers consider

whether those investments were really in the best long term financial interests of the client.

FASEA never said advisers had to have a discussion with their clients on their ethical preferences when it comes to investing.

“I don’t see how you can consider the preferences of your client without expressly asking those questions,” Rae said.

“It’s not until you start having that conversation that you realise they might have a preference on responsible investing.”

Asked whether FASEA took a strong enough stance on ESG issues, Goodments chief executive Tom Culver said no.

“I personally think they should have gone further. However you want to look at this, it’s critical that this is taken into account,” Culver said.

Invest with Ethics founder Alexandra Brown agreed.

“There’s a trend already towards ethical and responsible investing… then there’s ASIC updating its climate change risk disclosure reporting levels and the Modern Slavery Act,” she said.

“There’s this pull from regulatory and this push from climate demand. Larry Fink just announced all of Blackrock’s [active] funds will take sustainability into account. He mentioned this is being pushed by client interest.” fs

Queensland funds delay merger Harrison Worley

The impending merger of QSuper and Sunsuper has been delayed.

QSuper has confirmed its planned merger with Sunsuper has been delayed, owing to difficulties in conducting due diligence while staff are working remotely as a result of the COVID-19 pandemic.

According to the fund, the delay was “not unexpected”.

“Due diligence activities regarding our merger with Sunsuper are continuing (although remotely),” QSuper said.

“Like most organisations, COVID-19 is having an impact on the way QSuper works, with many of our employees moving to remote working arrangements.

“We remain fully committed to continuing this work. However, the timelines to complete the due diligence process will be extended. This is not unexpected and ensures that we can balance our members’ needs today and the long-term.”

Members questioned the merger plans in response to an online briefing by chief investment officer Charles Woodhouse in April, asking whether it is appropriate for the fund to consider a merger with its Queensland counterpart given the current circumstances.

“Superannuation is a long-term investment and we think there is long-term value in exploring what benefits can be gained for our members from this merger,” QSuper said.

He said the fund has always been focussed on investing carefully, to improve members with financial security in retirement.

“Our role is to manage both the needs of members today and their needs into the future. As you expect, our absolute core focus is helping our members right now, and no staff have been taken away from any of those core activities; all frontline employees remain dedicated to servicing our members, albeit with a focus on phone and digital rather than face-to-face,” the fund said.

In fact, the fund revealed it has recruited more frontline staff to maintain its services to members, and said the staff deployed to explore the merger are part of a “dedicated project team”.

“Work on this project doesn’t impact on services to members which is our highest priority,” QSuper said.

“The team remains focussed on ensuring that the right long-term outcome is achieved for our members.”

Neither QSuper nor Sunsuper have so far responded to Financial Standard’s requests for additional comment, including the length of the delay. fs

Publisher’s forum

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

01: Matt Reynolds

investment director, Capital Group (Australia)

Investing in volatile and disruptive times A

fter an extended bull run in global equities, financial markets are still coming to terms with the biggest shock since the global financial crisis. Concerns are high that the coronavirus outbreak will reverse economic growth and weigh on corporate profits for an indeterminate period.

In reality, the reaction of financial markets to the coronavirus pandemic is not the first bout of volatility investors have experienced during this extended bull run. It might be hard to recall, but global markets also saw a significant correction in 2018. As our chairman and chief executive officer Tim Armour remarked at the time: “The correction was overdue; the pullback didn’t leave me overly concerned.

Markets do better over the long-term when they experience corrections periodically; they can’t go up all the time.”

The volatility that we are experiencing now comes as markets were already nervous – about a slowdown in Chinese economic growth; heightened trade tensions between the US and China; political uncertainty in Europe; and the US presidential election later in 2020. In short, we are living in incredibly disruptive times – politically, economically and socially. And this disruptive environment is proving to be fertile ground for market volatility.

At Capital Group, we believe that for investors, one of the most important things to do during periods of volatility may also be one of the hardest – to contain your emotions. It’s never easy to do this when markets are on the way up, and when they are on the way down. But we know through experience that it is the key to creating wealth over time.

Purely in an emotional sense, market volatility can create doubt in some, panic in others, and anxiety for nearly all.

When investors see the value of their portfolios diminishing, their aversion to losses and ‘herd mentality’ can compel them to follow the behavior of others and sell in a falling market.

And once they have sold, many stay out of the market, feeling burnt by the experience. But that very reaction may cost investors dearly because those who sit on the sidelines risk losing out on periods of meaningful price appreciation that usually follow market downturns. Missing out on just a few trading days can have a significant impact on their financial retirement.

It is important to remember that time itself is one of the strongest factors in keeping the retirement picture intact. But staying invested requires a dispassionate and disciplined response to volatility.

Market corrections are not uncommon History continues to show that market corrections of 10% or more are not uncommon. The MSCI All Country World Index (ACWI), for example, has had 40 such declines since 1970.

When investors see the value of their investments dwindling, their aversion to losses can compel them to sell at a loss and stay out of the market. But that can cost investors dearly over time. Why? Because, although no one can predict how long a decline will last (making it impossible to time the market), stock markets tend to have a reassuring history of recoveries.

To examine the potential implications of not staying the course, we analysed MSCI ACWI1 data between 1970-2019, looking at the cumulative returns that would have been missed on average had investors with a particular loss aversion profile left the market2. While there was little meaningful impact one month later, the consequences were significant one, three and five years down the road.

For instance, a highly loss averse investor who rushed for the exit when the market dropped 10% and subsequently stayed out would have, on average, missed a cumulative return of 73% five years later. Investors with moderate or low loss aversion would have fared little better: they could have missed rebounds leading to returns of 68% and 53% respectively.

We also considered the same issue from a different perspective, keeping loss aversion constant and examining a wide spectrum of reentry points over a 30-year period. The conclusion remained the same: the longer the investor waited to re-enter the market, the more damaging the potential consequences. In short, staying invested can help produce higher returns.

At Capital Group, we believe that being in the market and staying invested is what counts, and that buy-and-hold investors come out ahead over the long haul. This is easier said than done, however, which is why it is important that there are certain portfolios managed by skilled investment managers that are designed to limit downside risk and reduce volatility, both of which can help counter behavioural biases. These types of portfolios can help calm investor nerves when markets turn turbulent.

That is also why we at Capital Group stress a long-term perspective and the importance of preserving capital during downturns. We believe that by producing results that are less volatile than the broader market, investors are less likely to react to fluctuating market conditions by making short-term decisions with potentially destructive long-term consequences.

9

The nation’s retirement savings is under threat because of COVID-19.

It’s not just because many Australians have taken advantage of the interim ‘early access to super’ rules to tide them over during this crisis, but also because many investors are inadvertently making rash decisions about their investments outside super.

Matt Reynolds, investment director, at Capital Group, said that when investors see the value of their investments dwindling, their aversion to losses can compel them to sell at a loss and stay out of the market. This could prove damaging to their overall returns in the long term.

In this issue, Reynold explains why financial advisers have good reason to tell their clients to hold their nerve and allow the eventual market recovery, as proven in history, to steer their retirement plans back on track.

Michelle Baltazar Director of Media & Publishing

It might not be an easy thing to do but it is well worth doing, so that investors can keep on track for the retirement that many of them have imagined. fs Past results are not a guarantee of future results. Investors cannot invest directly in an index. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. The information provided is not intended to be comprehensive or to provide advice.

1 MSCI All Country World Index (ACWI) (net dividends reinvested) from 1 January 2001; previously MSCI ACWI (gross dividends) from 1 January 1988 and MSCI World Index (net dividends reinvested) from 1 January 1970.

The quote

We believe that being in the market and staying invested is what counts.

2 We analysed multiple scenarios using a loss aversion ratio of 2.5 times and covered a total of 337 rolling periods. For the purpose of this study, we focused on three scenarios: investors with high (investor sells 50% of their portfolio when the market falls 10% and reinvests all the proceeds when the market rises 25% from its trough), moderate (investor sells 50% of their portfolio when the market falls 15% and reinvests all the proceeds when the market rises 37.5% from its trough) and low (investor sells 50% of their portfolio when the market falls 10% and reinvests all the proceeds when the market rises 50% from its trough) loss aversion, leading to high, moderate and low trading frequency respectively, which we compared with a buy-and-hold scenario.

The Capital Group companies manage equities through three investment divisions that make investment and proxy voting decisions independently.

Fixed income investment professionals provide fixed income research and investment management across the Capital organisation; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

FOR PROFESSIONAL INVESTORS AND INFORMATION PURPOSES ONLY NOT FOR PUBLIC DISTRIBUTION This communication is strictly for the confidential use of the recipient, solely for the purpose for which it is provided, and may not be disclosed or circulated to, or relied upon by third parties. Past results are not a guarantee of future results.

This information is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service. Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates.

While Capital Group uses reasonable efforts to obtain information from third-party sources which it believes to be reliable, Capital Group makes no representation or warranty as to the accuracy, reliability or completeness of the information. The information provided in this communication is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

This communication has been prepared by Capital International, Inc., a member of Capital Group, a company incorporated in California, United States of America. The liability of members is limited.

In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Level 18, 56 Pitt Street, Sydney NSW 2000 Australia.

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in the US, Australia and other countries. All other company and product names mentioned are the trademarks or registered trademarks of their respective companies. © 2020 Capital Group. All rights reserved.

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10

Opinion

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Super and the virus

ow, more than ever super fund members N are going to need the superannuation industry to be there for them. This comes at a time when the operations, investments, and finances of superannuation funds will be subject to severe and quickly evolving challenges.

The challenge ahead may be intimidating, but it is also an opportunity for superannuation funds to engage with and serve their members’ best interests in a period of uncertainty, temporary retirement, social distance and self-isolation.

A regulatory response for economic survival The sudden and severe economic shock caused by the pandemic has necessitated a fiscal response from governments on a scale never seen before. Successive packages were released in a matter of days, intended at keeping as many people and businesses solvent while the economy hibernates for winter.

Parliament passed an initial Act of measures which will involve the superannuation system.

It’s unlikely that the measures are the last, with Parliament set to be recalled to debate the next round of measures.

Important measures affecting superannuation funds were passed by Parliament: 1. Creating a new COVID-19 compassionate ground early release condition to allow access up to $10,000 (tax free) for the current and next financial years for eligible members. Eligible members will be those who are unemployed, have had their role made redundant, are in receipt of a social security benefit, or have seen a decrease in working hours of at least 20%. Importantly, the amendments do not specify any minimum documentation or evidentiary conditions for meeting these requirements. Individuals will self-assess their eligibility to apply for a determination directly to the ATO via MyGov. 2. Providing pensioners with account based

pensions with flexibility to adjust their minimum draw down thresholds by 50% in the current and next financial year (as in the GFC) to avoid mandatory asset sales during the market downturn.

3. Reducing the social security deeming rates (including the age pension) 50% for the 201920 and 2020-21 income years. As of 1 May 2020, the upper deeming rate will be 2.25% and the lower deeming rate will be 0.25%.

4. Granting Treasury powers to provide relief from certain obligations under the Corporations Act for up to six months which might be difficult (or impossible) to comply with under the current environment (such as holding AGMs in person).

These changes are currently being implemented swiftly and accurately to policies, procedures, and administration systems of superannuation trustees and their key suppliers, placing a strain on resources already under pressure implementing a heavy agenda of regulatory reforms.

There are also likely to be further reforms affecting the superannuation system in subsequent tranches of economic relief packages.

The existing agenda for regulatory change which included reforms commencing from 1 July 2020 to implement recommendations of the Royal Commission seems to have been deferred (given Parliament is unlikely to sit to debate it before then), with APRA and ASIC also indicating that their regulatory change agendas are on hold.

The quote

Superannuation trustees should also consider proactive campaigns to communicate with members what superannuation funds can do to support members.

quickly to ensure that the member service and financial advice functions are adequately resourced and equipped with the necessary information and support in dealing with huge increases in the needs of their members. Members are likely to be experiencing uncertainty, unemployment or financial hardship at the same time as the health and distancing measures presented by the pandemic.

The recent announcement of the JobKeeper $1500 fortnightly wage subsidy scheme will be welcomed by workers and employers alike, yet there will still extensive fear and financial stress for those unlikely to be covered by the scheme.

Tragically, there may also be an increase in claims for death benefits resulting from the spread of COVID-19 and the resulting strain on the medical and hospital resources. Superannuation funds should be considering measures to ensure adequate resources are in place to manage these claims as efficiently and diligently as possibly.

A potential calamity also seems to have been averted, with some group life insurance policies being promptly adjusted to ensure coverage for COVID-19 related events.

Superannuation trustees should also consider proactive campaigns to communicate with members what superannuation funds can do to support members during such difficult times will also be critical over the coming weeks. After years of trying to encourage members to engage, superannuation funds will find that members are eager to engage when they really need to.

A sudden pivot

Working from home

The magnitude of the economic shift, and the resulting response from government will undoubtedly result in a sudden pivot or management and strategic attention towards activities which will inevitably and undoubtedly need to be prioritised by superannuation funds.

Superannuation trustees have had to act

The challenges faced by superannuation funds would be profound under normal conditions.

This is greatly pronounced by the fact that the work forces of superannuation trustees and their material service providers are shifting to contingency planning, with most staff being also required to work from home.

Opinion

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

11

01: Jonathan Steffanoni

partner, legal QMV

Recent investments in cloud based working technology will prove invaluable in enabling many employees to work from home. It may be that the pandemic does what management has been trying (and often failing) to do for years, and push people towards more flexible online working arrangements. However, there will be some employees involved in core infrastructure support and direct member service such as contact centres that may still need staff to attend on site.

Employees of superannuation funds will inevitably contract COVID-19 or need to care for family members who have. Many more will need to deal with the challenge of adjusting to working from home with family, and the general stress caused by the pandemic.

The superannuation industry is serviced by a wonderful workforce of smart and hardworking professionals with a broader social purpose.

Even still, ensuring the effective management and operations of superannuation funds will throw major challenges to funds that are working under difficult conditions.

Liquidity There has been plenty of noise about superannuation funds and liquidity and the robust debate is not without merit. The significant increase in benefit payments arising from financial hardship, compassionate grounds, and death benefit claims may present a liquidity risk for trustees. Contribution flows are also likely to slow (especially as it seems that wages subsidised by the JobKeeper scheme will be exempt from attracting SG obligations), as unemployment and underemployment rises sharply.

This comes at a time where the rush to cash has seen equity and debt investment values con-

tract, albeit with plenty of volatility. The sudden and acute economic contraction has been economically breathtaking carries a risk of becoming chronic while continuing to be severe.

While typically long-term investors, the increased demand for cash to pay benefits will require that superannuation funds closely monitor liquidity of cash reserves - and possibly adjust strategic asset allocations and sell down some assets in a market which will realise potentially significant capital losses.

Some funds are undoubtedly under stress, however much of this may arise from a reluctance to offload investments in current market conditions rather than genuine illiquidity events. Nevertheless, there have been calls for central bank finance to ensure cashflows to pay benefits are funded in an orderly manner.

Superannuation trustees are undoubtedly already enacting measures to control liquidity risks, while balancing the longer term needs of protecting the value of assets held. While some funds are invested in unlisted and infrastructure assets which are rather illiquid by nature, the allocation to these assets is unlikely to create any rush to liquidate these assets in the short term. Ongoing and close attention will however be critical over the next few months, to cater to various scenarios which should already have been stress tested.

Shrinking fee revenue and calling on the ORFR? The fee revenue deducted from member accounts to fund the operation of superannuation funds is sometimes linked to asset values - and may contract materially for some funds with the recent falls in asset prices. This may see that some funds need to increase fees or consider one

The quote

It may be that the pandemic does what management has been trying (and often failing) to do for years, and push people towards more flexible online working arrangements.

off levies to ensure fee revenues cover the costs of operating in difficult times.

The use of a fund’s Operational Risk Financial Requirement (ORFR) reserve is tightly limited to circumstances where “a cost has only materialised as a result of the operational risk event and payment of the cost in a timely manner is essential to ensure that the loss is properly addressed and members do not incur large one off expenses.” It doesn’t look likely that the ORFR reserve would be called on in the current circumstances (the ORFR reserve is not a liquidity risk reserve). Legal advice would certainly be required if this or use of a general or other reserve is being contemplated to cover a relative increase in operational costs, or to provide liquidity for benefit payments.

However, if circumstances of an acute squeeze on operational costs eventuated and the ORFR reserve could not be utilised, the trustee could request APRA to adjust or exclude a specific prudential requirement to enable it to recover these amounts from the ORFR reserves. Let’s hope things don’t come to this, but it doesn’t hurt to start thinking about it, especially when there’s talk of seeking central bank finance.

Raison d’etre The superannuation system exists to help Australians save for and provide income in their retirement. There is some understandable reluctance from the industry to set a precedent to allow early access. Yet, ensuring that superannuation funds are there for Australians when they need it most is not only the right thing to do, but an opportunity to engage with members by being there for them when they really need it, building trust and contributing to preserving some longerterm financial stability for members. fs

NEWS

Now is the time to step up: FEW Jamie Williamson

At a time when most are concerned about making career moves, those on the path to leadership are being told now’s the perfect time to put themselves out there.

That’s according to Financial Executive Women executive director Alex Tullio, saying there is opportunities everywhere for those ready to embrace them.

Speaking to Financial Standard, Tullio said conversations between FEW members and their c-suite advocates are increasingly revolving around how now is the time for people to apply for the roles – promotions or other – that they’re looking to take on.

“The natural reaction is to assume that companies are laying off or not interested in hiring at the moment but there’s actually jobs all over the place,” Tullio said.

“Certainly some organisations are doing less but people still need talent, or they’re reshaping their businesses and that requires new or different skill sets.”

Tullio said FEW’s advice to people looking for a new challenge is to be proactive.

“Get your brand out there, be more visible, think about all the chief executives who are sitting at home at the moment who would have otherwise been inaccessible and yourself known,” Tullio says.

“Now is the time to work out what you want to do and grab it with both hands.”

Building the confidence to do so is what FEW is all about and it’s a theme that

underscores FEW’s recently launched FEW Connect livestream series, hosted by Tullio and FEW chief executive Judith Beck.

Launched in late March as an alternative to the group’s regular networking events, FEW runs four livestream sessions a week, all covering different topics and featuring different business leaders and experts as guests.

The sessions have proved so popular, FEW Connect now has over 1200 subscribers logging in each week via YouTube and Facebook Live.

“This was really just about showing up for our members and now they’ve taken on a life of their own and started providing people with structure,” Tullio said.

“Feedback has been really positive. The sessions are really practical for our members and people are telling us they’re looking forward to them each day, leaning into the human connection.”

Tullio said there’s been three broad themes emerge from the discussions had, and the first is around leading teams and ensuring productivity during COVID-19.

“The problems we’re seeing are not new problems, but the current environment is amplifying some of the challenges that were already there,” she said.

“Some have been around how to be an empathetic leader when still running a business and trying to meet KPIs. But there’s also, unsurprisingly, the issue of communication and how you keep teams focussed and motivated, and maintain connection without it becoming overbearing.” fs

12

News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Super startup launches raise

01: Scott Tully

general manager investments Colonial First State

Kanika Sood

GigSuper is aiming to raise $100,000 to $400,000 from retail investors, in a crowdfunded equity campaign launched on May 5.

The fund is conducting the retail raise through online platform Birchal and has set the minimum investment at $250 and the maximum at $10,000. It runs for the next 22 days.

It is to be followed by an institutional one next month.

GigSuper is about two years old and caters to the subset of self-employed workers, of which it says there are 1.3 million Australians with $88 billion in superannuation savings.

The fund was founded by former IG colleagues Peter Stanhope and Martin Batur, and Branka Injac Misic.

The fund went live about four months ago in beta phase and has 25 financial members with about $1 million in funds under management.

It is advertising a pre-valuation of $6.02 million, up to $400,000 of which will be allocated to retail investors and $2 million to $3 million will come from an institutional raise next month, as a part of which it will also add board members.

The valuation was decided by GigSuper’s board and is based on its estimate of the addressable market of $88 billion in superannuation savings across 1.3 million workers, instead of current revenue.

The fund will put the money towards client acquisition, education resources and building a native app. fs

FPA launches new ROA solution The Financial Planning Association of Australia has launched a digital version of the Record of Advice (ROA) solution ‘template’ to support members who have been inundated with requests for advice, following the strong demand for early super access.

The FPA along with SMSFA, CA ANZ, CPA and IPA made the ROA template available to help members quickly and efficiently provide advice to their clients through an easy to tailor ROA template.

The template allows advice to be provided for a single or a couple, and for withdrawals immediately, from July, twice, or to recommend no withdrawal is made.

FPA chief executive Dante De Gori said the digital ROA template is one of the many initiatives that has been developed to drive efficiencies in advice practices and reduce the cost of advice.

“This will be key to improving the overall advice experience,” De Gori said.

“The FPA understands that even with the relief provided by ASIC – i.e. the use of ROA and the extension of time from five days to 30 days – it will still be a difficult ask for members to be able to provide advice to existing clients on accessing super at the price point set.”

De Gori said the FPA has partnered with Midwinter, Financial Mappers and AdviserLogic to make the template available digitally.

“We are supporting our members by helping them quickly and efficiently provide advice within the parameters required,” he said.

“To date, more than a million Australians have applied for early access to their superannuation savings.” fs

Super switching three times higher: CFS Eliza Bavin

N The quote

We saw some people switching to cash, which means those members missed out on upside as markets rebounded.

ew data from Colonial First State (CFS) found switches by super members were three times the usual rate in March as Australians moved their super to cash in the midst of the COVID-19 pandemic.

The data found 39% of those that switched their super moved into cash and slightly less moved to growth assets.

The second most popular investment category was Australian shares, with 26% of those who switched moving into equities.

“Switch call volumes peaked on March 23 after the S&P/ASX shed 5.6% to 4546, down 36.5% from its peak just over two months ago,” CFS said.

“The market reaction was in response to news that businesses across the country should prepare to scale down their operations.”

CFS said it experienced the highest number of switches to cash, at 65%, and the lowest percentage of switches by dollars to growth assets (9%) on that day.

CFS said while looking to avoid losses caused by the sharp declines in the share market, members who switched to cash at the

bottom of the market may have missed out on the gains in the markets in the period after.

Scott Tully01, general manager investments at CFS, said: “We recognise the importance of being focused on investing for the long term and we’ve been talking to our members directly about this to help them navigate what are understandably a concerning set of circumstances.”

“We saw some people switching to cash, which means those members missed out on upside as markets rebounded.”

Tully said that while some of those members may have missed out, CFS was encouraged that many also stayed the course and remained focused on the long term.

“Fear of volatile markets can drive decisions that might not be in a member’s long term interests,” he said.

“The switching activity we have seen is directly linked to how the Australian market is performing on the day.

“However, selling after markets have fallen means that you lock in those losses and longer term investment outcomes may be more difficult to achieve.” fs

Adviser salaries in 2020 revealed Jamie Williamson

Despite current uncertainty, latest insights show a senior financial adviser with more than 10 years’ experience can still expect to take home up to $160,000 per year.

Riva Recruitment’s Financial Adviser Salary Guide 2020 shows a senior adviser in Sydney or Melbourne who has been in the role for at least five years and has a minimum of 10 years’ total experience can expect annual remuneration of $120,000-$160,000.

That is inclusive of superannuation, but does not take into account any possible bonuses.

For a financial adviser with up to five years’ experience, a salary in the range of $90,000 to $120,000 is the benchmark, while associate advisers with up to three years in the role can take home between $75,000 and $90,000.

For paraplanners, those in a senior role – or more than three years’ experience can expect between $85,000 and $100,000, while the benchmark salary for those with less than three years’ experience is between $55,000 and $85,000.

Finally, those working as client services managers could expect a salary of up to $90,000 while client

services officers are generally paid between $50,000 and $70,000.

Riva Recruitment said with all big four banks’ having now signalled their intention to exit financial planning, there will be an influx of candidates for advice roles, many of which will need to adjust their expectations.

“Majority of bank financial advisers have been earning over $130,000 packages plus bonus, with some advisers earning north of $145,000 package plus bonus… Given the current environment, financial advisers need to reset their salary expectations to be aligned with the current market,” the research said.

Further, Riva said recruitment has slowed due to business uncertainty and the difficulty in onboarding while most in the industry work remotely.

“Businesses that charge a percentage-based fee have been most effected during COVID-19.

These businesses are either putting recruitment on hold, forcing employees to take a pay cut, or in a few cases, have made redundancies in support/ operations staff,” the research reads.

In contrast, businesses operating with a flat-dollar feefor-service model have largely retained staff, Riva said. fs

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News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

13

Executive appointments 01: Lee Hopperton

UniSuper advice chief departs UniSuper chief of financial advice Jack McCartney left the $86 billion industry fund in late March, after more than six years at the helm of the fund’s advice operations.

The industry fund confirmed McCartney’s departure to Financial Standard, and said his decision to leave came after he decided to retire from full-time executive responsibilities.

McCartney’s departure comes amid several other changes to the fund’s leadership.

In the interim, the fund has appointed advice regional manager Graham Eggins as acting chief of financial advice.

Eggins joins the fund’s executive leadership alongside fellow acting c-suite executive Leigh Cleland.

Cleland, the fund’s head of risk transformation, has been temporarily elevated to the vacant chief risk officer role which has yet to be permanently filled following the January departure of Ruby Yadav.

Yadav has since commenced in a new role as Mercer’s chief risk and compliance officer.

UniSuper said that for the moment, it is more focused on the COVID-19 pandemic than on finding permanent replacements for McCartney and Yadav.

“UniSuper has put the selection process for these roles on hold while we focus on our COVID-19 response,” UniSuper told Financial Standard.

Meanwhile, non-executive director Neville Kitchen has departed the fund after more than six years. Michelle Somerville also ended her long-term relationship with the fund, bringing to a close more than four years as a consultant to its audit, risk and compliance committee.

Somerville was replaced by former Deloitte partner Sarah Woodhouse, who joins the firm as a consultant alongside former CommInsure chief actuary Jennifer Lang. Lang has been appointed as a consultant to the fund’s insurance committee.

Statewide adds two executives Statewide Super has appointed Deloitte risk advisory director Jason Muir as chief risk officer, and EY director Simone Dyda as chief financial officer.

Muir brings more than a decade of risk management and assurance experience to the industry fund, through stints at BT - where he spent more than three years - and KPMG both in Australia and the US. During his time at BT, Muir supported the development of the compliance framework for the wealth manager’s advised and non-advised platform superannuation products, in addition to working on the simplification of member pricing and the removal of grandfathered remuneration from legacy products.

Dyda links with the fund after 15 years at EY, where she worked with several financial services and member-based organisation clients.

Statewide said Dyda excels in financial reporting and due diligence, and pointed to the various leadership roles she has held across her time with the firm.

“I am very confident in Simone and Jason’s skills and ability to bring the required rigour

CFS exec joins Powerwrap Powerwrap has confirmed the appointment of Sue Wallace as special projects lead on a contract basis.

Wallace joined the platform in March, coming from CFS where she headed the institution’s Wrap platforms.

Wallace had been linked with CFS for more than 15 years, having joined Avanteos as national account manager in 2005. In 2009 she moved to CFS as senior manager, custom products.

Over the years she held a range of roles, working her way up to lead the Wrap platform.

Wallace also sits on the advisory board of Financial Executive Women.

and appropriate approaches in managing the organisations risk culture and financial management practises to achieve the best outcomes of our members,” Statewide Super chief executive Tony D’Alessandro said.

Both Muir and Dyda will begin their new roles with the fund on May 15. Their appointments come after their predecessors ceased employment with the fund abruptly earlier this year.

Separately, the fund recently revalued its unlisted assets as a result of the market volatility caused by COVID-19. In an investment update to members, Statewide said it made the decision on the back of advice from external valuers and investment managers.

The fund pointed out its investment managers were also using external valuers.

“Various airports were marked down between 13.5%-15% in the month of March,” Statewide said.

“Most of our unlisted property assets consist of core commercial properties with very low gearing and they too were marked down.”

Statewide eased members’ concerns by pointing out that it considers unlisted property and infrastructure assets as growth assets, amid recent industry discussions over how they should be most appropriately categorised. .

Pendal appoints HNW sales lead Lee Hopperton01 was most recently the chief executive and distribution head of value manager Auscap Asset Management in Sydney for four years. ln his new role, Hopperton will look after Pendal Group’s sales and relationship management for the HNW channel, including family offices. He started on April 20.

Lee has about 20 years of experience, including seven at Macquarie Group as an equities analyst in Sydney and London and then on the institutional equity sales desk.

Between 2006 and 2014, he was head of the Australian and then Pan Asian equities desks for JPMorgan in Europe before becoming head of distribution in Seoul where he ran the equities trading and stockbroking businesses, according to Pendal.

Newly-hired Hopperton reports to North Ash. The entire wholesale team, which includes HNW channel, is 12 members.

“The HNW channel is a key strategic priority for Pendal in the Australian wholesale market. We are delighted to have attracted a sales manager of Lee’s calibre and experience.”

“We conducted a very thorough search and had a lot of interest in the role,” a Pendal spokesperson said.

Pendal’s March quarter results saw it slip from managing $101.4 billion at December end to $86 billion at March end, after losing $3.9 billion to outflows, and $15.7 billion to investment-related factors (performance, market movements and distribution).

Frontier Advisors makes key hires Joe Clark and James Bulfin will join Frontier’s alternatives and derivatives research team as senior consultants.

Clark joins from QIC where he was senior

02: Simone Gavin

quantitative strategist and portfolio manager for insurance linked securities.

Bulfin had a 10 year career at Goldman Sachs as a macro trader and in treasury management before moving to Singapore to work as a macro trader for Barcap.

Simone Gavin02 will join the equities team at Frontier as a senior consultant. She previously worked at Frontier as an analyst in 2005.

More recently, Gavin has been associate director at S&P Global Ratings and a senior investment analyst at Lonsec.

With widespread hiring freezes across the financial services industry due to the economic fallout of COVID-19, Frontier Advisors bucked the trend bolstering its staff.

The asset consultant also announced Desmond Tam and Pat Phanussopakul have joined as associates. Bowei (Sam) Li also joined the firm as a quantitative developer within the technology team.

Prachi Bansode joined as junior application developer, Lee Oliphant has joined as IT service delivery manager and Anh Duong as finance assistant.

“Our staff numbers have been growing strongly for some time and it’s exciting to be able to start the year with some more highly credentialled people across our entire business,” Frontier Advisors chief executive Andrew Polson said.

“In particular, we are adding valuable technical depth and many years of experience to our sector research teams, which will deliver a lot of value to our clients.

“And, it’s no secret we have ambitious plans to build our already strong technology capability out even further so it’s pleasing to be able to add more bandwidth in this part of the firm.”

Legalsuper hires investment expert Former chief operating officer, director and member of CFSGAM’s global executive committee Joe Fernandes has joined Legalsuper as an independent investment expert to chief investment officer Norman Zhang.

In his new role, the former First State Investments Asia managing director will join the fund’s investment committee, working closely with Zhang and the internal investment team in a move designed to bring the fund “independent, external advice and support” for its overall investment strategy and approach.

Legalsuper chief executive Andrew Proebstl said Fernandes as well aligned to the fund’s “strategic positioning, ambition and organisational values”.

“Joe’s senior investment and management experience, and professional capabilities, were evident from his interactions with Legalsuper executives and members of the board,” Proebstl said.

“The thoughtful, measured insights he offered during our selection process and his clear understanding of the strategic investment opportunities and innovations available to Legalsuper in a challenging and uncertain environment, distinguished him.”

Fernandes comes as Zhang begins to embed himself within the fund, having joined from Media Super at the beginning of March. fs

14

Feature | Health and wellbeing

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

GOOD TIMES, BAD TIMES COVID-19 is testing Australians’ mental resilience but the financial services industry is stepping up. Kanika Sood writes.

Health and wellbeing | Feature

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

A

s a portfolio manager, Liam Donohue 01, is familiar with the pressures of working in finance.

“The share markets are open every business day [and] there’s almost a chance of perpetual stress because every minute or every hour, you can see how investments are performing on a live basis,” Donohue says.

“If markets are good or markets are bad, it can have a real impact on your mood or levels of stress.”

The Australian small caps index, to which Lennox’s fund is benchmarked, lost 26.72% in the March quarter. The fund itself, like many others in its category, performed worse than the index.

When markets tumble so hard, it’s a difficult time for both end investors and professionals like Donohue.

“From a personal perspective, [to manage stress] I try to decipher short term noise into what is important and what’s not and just focus on the outcome that will be achieved on the medium term horizon of over three years, which is how we invest,” he says, adding that leaning on teammates is another way of dealing with shortterm volatility.

“I make sure that every day I go out and do some exercise, even if it’s just going for a walk for 20 minutes. Getting away from the desk is a great way of ensuring that you don’t get too caught up in the minute by minute of the markets.”

Donohue and his co-founder left Macquarie to start Lennox about three years and a half years ago.

At their new firm, in which Challenger has a minority stake, the founders opted for no strict dress codes, ad hoc annual health and wellbeing spending for things like flu shots and cancer checks, and a quarterly personal health day off – no questions asked.

However, Lennox hasn’t gone as far as to provide private health insurance for its threepeople team.

Donohue’s brother battled mental health illness when young, and the experience prompted

Donohue to start the Black Puppy Foundation over 10 years ago which has so far spent about $1 million to fund 10 post doctorate research candidates working in youth mental health, with tailwind from Macquarie’s staff giving matching program.

Despite his foundation’s commitment to mental health, Donohue hits a roadblock when asked to name an Aussie funds management firm with a great mental health program for its employees.

“Off the top my head, I don’t [know]. It would be a great initiative, particularly with larger companies where they can get scale for their employees – but I am not aware of any that do that at this point,” he says.

The financial services industry employs about 800,000 people or 6% of the total population, and these are far from peaceful jobs with the market cycle changing every seven years, barring the last bull run.

Financial industry professionals have battled initial threats from technology to their jobs, consolidation, arrivals and departures of international firms, and recently a wave of regulation sweeping from how superannuation funds service clients to which advisers are qualified to continue in their jobs.

The latest challenge, COVID-19, will shave off $60 billion from lost wages and profits from Australians between April 1 and July 30, according to Deloitte Access Economics economist Chris Richardson02 .

“And that’s even after allowing for the extraordinary support to families and businesses that has been rolled out by the federal government,” Richardson said in recently published research.

The number for banking and financial services will be over $3.5 billion.

Richardson’s own firm is an example of the situation as it – like many other financial services companies – reportedly asked partners to take a 20% pay cut.

While the government has already rolled out its $213 billion stimulus packages, and the ASX perked up in April rising the most since June 2000, the consensus zeitgeist is that the world is in a deep recession with a long way to recovery.

And so mental health needs more tending to than ever before.

01: Liam Donohue

02: Chris Richardson

portfolio manager and principal Lennox Capital Partner

economist and partner Deloitte Access Economics

In times of crisis

It’s hard to ascribe causeeffect but claims go up during recessions, when people are unemployed and mental health claims are to some extent a part of that.

Sean McGing

The COVID-19 crisis follows bushfires which devastated parts of Australia from September last year to this February. While the 2009 bushfires remain the deadliest on record in Australian history with 173 deaths, the recent incidents also had discernible toll on humans and wildlife.

In February, Prime Minister Scott Morrison said the bushfires in January had resulted in the loss of 33 lives, nine of which were firefighters.

At that month’s end, 3094 houses had been lost to the fires across NSW, Victoria, Queensland, ACT, Western Australia and South Australia.

January estimates put the loss of mammals, birds and reptiles in NSW and Victor from bushfires at over one billion.

While the 2019-2020 bushfires were a significant event, drought remains an ongoing reality for many parts of Australia. The ABC in early March reported water stores were down in every state and territory.

Initial concerns around the economy saw experts predict a 0.25% dip in the GDP for the third and fourth quarters and a slimmer budget surplus, as a result of fires and drought..

The COVID-19 crisis has had a much bigger impact, with experts comparing it to the Global Financial Crisis in 2008, the 1988 recession and in some cases even the 1930s great depression.

This time around, Australians will need much more mental resilience because the road to recovery is long and possibly with shutdowns.

Economic recovery aside, many outdoorloving Australians have had to weekend outings since the start of the year, first as bushfires closed off national parks and now the COVID-19 pandemic forces social distancing.

One industry that could bear the brunt of a pandemic-related decline in Australians’ mental health is life insurance.

Sean McGing03 , who is an actuary at Melbourne’s McGing Advisory & Actuarial, says historically, life insurance claims have gone up in times of recession.

“There’s a very clear link between recessions and claims. It’s hard to ascribe cause-effect but claims go up during recessions, when people are unemployed and mental health claims are to some extent a part of that,” he says.

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16

Feature | Health and wellbeing

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

03: Sean McGing

04: William Johns

05: Margo Lydon

actuary and managing director McGing Advisory and Actuarial

financial planner and founder Health & Finance Integrated

chief executive SuperFriend

Specific to COVID-19, McGing thinks there are two areas that factor into how much a mental health impact it could have.

“First is around the stress directly affecting people and the second is the financial uncertainty around losing jobs. Influencing both of these is the intensity and duration of COVID-19 and when we can get back to normal,” he says.

Mental health claims account for roughly 25% of total life insurance claims, McGing says.

And this has grown (in both number and dollar amount) as a proportion of total life insurance claims, due to a combination of factors: society’s increasing acceptance of mental health conditions, increasing competition and work pressures, and the fact that recovering from a mental health condition can stretch for longer periods than recovering from something physical, like a broken limb or torn ACL. “Something like COVID -19 is going to exacerbate that but how much waits to be seen,” he says.

The pandemic may result in new claims from people whose mental health has been affected since the crisis, while potentially also prolonging the recovery of existing claimants, as support and rehabilitation services are disrupted by lockdowns.

But will it unleash upon Australians another wave of increases to premiums, which have already gone up more than once for many members since the start of 2019 on back of recent regulation like the Protecting Your Super Package?

“From a pricing perspective, APRA and the industry have been concerned about the lack of profitability and hence sustainability in disability income insurance. Is that going to get worse after COVID-19? It’s very hard to know what you are expecting is mental health claims to rise but it’s hard to be more specific at this point,” McGing says.

The adviser experience William Johns 04 is a financial planner and founder of Health & Finance Integrated, which handles about $20 million to $30 million in claims each year.

About 20% of this is mental health claims, which arise either as a result of another illness (like a neurological disorder or chronic pain) or from purely mental health conditions (like schizophernia, manic depression, anxiety or paranoia).

“In structuring a claim, the latter (for well managed patients) is usually easier to prove because there is usually a body of evidence from a GP [general practitioner] or psychologist…if there is no history of management, it might be tougher,” Johns says, in his personal capacity.

And if the claim is because of a subset of a pre-existing condition, it can get caught in the clauses, he adds.

“For example, if somebody with back pain takes out a policy, they may be excluded from

any future claims arising directly or indirectly because of that,” Johns explains.

“If they try to lodge a claim for depression, [the insurer] may argue the depression was a co-morbidity of a pre-existing condition such as spine deformation causing lower back pain.”

Johns says he is expecting mental health claims at his firm to increase 5% to 10% this year because of COVID-19. It’s not a huge uptick because his practice focuses on servicing clients with ongoing illnesses and disorders, he says.

“I suspect that people will start looking into their insurance a bit more to see if it’s time to claim. I certainly see that litigation or injury based law forms are advertising a bit more,” he says.

And his experience has been that as more hospitals deploy staff to front-lines of COVID response, it has been a longer wait in getting reports from doctors and consequently, claims approvals to people.

In addition, are the growing instances of some superannuation trustees asking for copies of the claimants’ clinical notes (private conversations between a doctor and a patient) after an insurer or two qualified professionals have already signed off on the file, he says.

Johns says: “It’s quite important to respect confidentiality of the file and not ask the patient or doctor to provide private clinical notes that go to the causation of the illness details because it will lead to some people withdrawing their claims to protect their privacy.”

Training pays off Even if life insurers and superannuation funds are able to stave off a price hike for customers and advisers are able to get claims to those in need, financial professionals still have the concurrent issue of securing their own wellbeing during COVID-19 isolation.

SuperFriend helps industry superannuation funds and life insurers implement mental health training programs for their employees in the prevention space. It also works with employers and external clients.

The organisation is funded by a 15 basis point contribution from premiums paid to the life insurers with whom it has five-year agreements. It stays away from policy issues such as the industry’s code of practice.

SuperFriend chief executive Margo Lydon 05 says it provides skill-based training to staff at superannuation funds and insurers to support their self-care and the wellbeing of people who call their contact centres.

“You don’t usually call your super fund when you are having the best day ever,” she says, to emphasise the role of staff in supporting people and recognising signs of distress.

“In my 10 years, I am yet to have a conversation with a superannuation fund or an insurer who is not genuinely willing to improve the wellbeing of employees and members.”

Lydon says recent years have seen many crises; after the Royal Commission the organisation’s first job was to tell the staff to look after themselves and not judge what happened at the hearings, and then to support them through changes in the industry.

During the bushfires and COVID-19, SuperFriend released extra resources to its existing program.

“The biggest learning is that to deliver a once off training [on mental health] to your staff and expecting it to have long-term effects does not work. It’s almost like expecting panacea,” she says.

“Mental health training is a little bit like learning anything new, you master the basics before moving to more advanced levels.”

Mental health training is a little bit like learning anything new, you master the basics before moving to more advanced levels.

Margo Lydon

Insurer initiatives Simonie Fox06 is national manager, wellbeing at AIA Australia. Her job involves developing programs that improve the wellbeing of AIA’s claimants and help prevent such claims happening in the first place.

A usual day for Fox may involve working with AIA’s claims or occupational team to roll out initiatives, liaising with external vendors to working with the business team to look at the offering’s value proposition.

She expects mental health claims arising from the crisis to outweigh directly COVIDrelated claims, as Australia had largely flattened the curve of new infections as of April end.

The pandemic comes soon after bushfires and AIA’s wellbeing response to the two has some commonalities.

“The thought process is quite similar to the process to what are we are going through COVID where people are experiencing a crisis that can be life threatening,” Fox says.

In its bushfire response, AIA provided social services support (such as how to get financial support) to its existing Mind Coach program which it introduced in 2018.

For its COVID-19 response, it added a COVID-19 slant to the existing Mind Coach program and introduced two additional programs, Breathe Well for customers with chronic lung conditions and a COVID-19 module for customers suffering from cancer, which is offered with expertise from CancerAid. “We know that our customers with cancer, which is one of our three highest [causes of] claims, are at a higher risk if they are exposed to COVID-19 and that in itself has produced a lot of anxiety for those customers,” she says.

Mind Coach, which forms the backbone of AIA’s health coaching, is a seven-session program that they offer their claimants for depression or anxiety issues over phone.

AIA’s claims teams can also refer anyone they speak to over the phone for the program if they feel the caller is showing signs of stress.

“Basically, the coach (in Mind Coach pro-

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Feature | Health and wellbeing

gram) uses cognitive behavioral therapy principles in discussing what’s going on, helping them to cope better with the circumstances in their life and tapping them into the health care system if they need to access evidence-based talking therapy,” Fox explains.

Fox points out that Mind Coach is not a replacement for therapy but a coaching program.

“It is similar to executive coaching or health coaching where you set your goals and then are given strategies to achieve those goal. It also identifies when someone is not accessing the medical treatment they need and helping those customers to access treatment through the Medicare system,” she says.

If at the end of the seven sessions, the coach feels the customer needs extra help, they can refer them to Medicare or to occupational or rehabilitation programs at AIA Australia.

Fox says, in the last quarter, AIA Australia had a referral rate of 53% into the program.

Mind Coach is a successor to AIA Australia’s old comprehensive wellness program called RESTORE (which still runs) and was released around the same time that life insurance giants were grilled by the Royal Commission into misconduct in banking, superannuation and financial services industry. As this story went to print, insurers are again facing grilling from a Senate Committee.

Fox says Mind Coach was not a response to the Royal Commission, but a means of solving a problem.

“We have had our RESTORE program in place for many, many years and the challenge when you are trying to support someone with depression or anxiety is that the nature of the condition is often to withdraw,” she says. “[In a rehabilitation program] they have to meet a mental health consultant and perhaps do an exercise program – and that can be really daunting.

“We thought if we had a health coaching program which is available to everybody and it is over the phone, maybe that would be not be so daunting and that’s exactly what we found.”

She says AIA saw a 35% increase in people going through to rehabilitation programs, as customers were able to build trust initially with the company. Some were ready to go back to work after it alone.

“At the beginning of the program 72% of people were classified as “severe” in regards to their mental health and at the end of the program this was halved. 40% were also classified as “well” or having “mild” symptoms at the end of the program,” Fox says.

Staff programs Self-gratitude is also something that Ian Macoun 07 is reminding his employees to practice during the virus’ fall out, as the managing director of ASX-listed multi-boutique business Pinnacle Funds Management, which had a

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

06: Simonie Fox

07: Ian Macoun

08: Alva Devoy

national manager, wellbeing AIA Australia

managing director Pinnacle Investment Management

managing director Fidelity International Australia

market cap of about $740 million at April end and employs 73 people.

“Most importantly, I think, those of us who are healthy and in stable roles must remind ourselves that we are better off than many others, and I believe the Pinnacle team will come through this period stronger,” Macoun says.

The business currently runs an employee assistance program which provides confidential counselling services via phone, video or face-toface meetings.

“We have been reminding staff about this program regularly throughout the pandemic…

The reported rates of mental-ill heath in the financial services industry is of great concern to me. This topic wasn’t something spoken about openly many years ago but thankfully it is now, and we encourage open and frank conversations about personal wellbeing,” he says.

He’s also telling employees to maintain a “stability rock”, a principle it adapted from ReachOut which it supports through its corporate philanthropic foundation.

“A stability rock is something that helps individuals maintain a sense of normality in their lives when it seems things around them are out of control,” Macoun explains.

“This could be anything from a morning jog to setting aside some time to read every day…

For me, my stability rock is a daily walk with my wife.”

It’s also business as usual for staff social activities, just the meeting place has changed from its Margaret Street offices and nearby places to the internet.

“Our retail distribution team has been hosting regular quizzes after hours on Fridays for all staff to be involved in and they have been great fun,” Macoun explains.

The company is also encouraging employees to turn on their videos during daily online meetings if they feel comfortable doing so.

“Seeing the familiar faces we’re used to seeing day-in, day-out is a great tonic,” Macoun says.

At Fidelity Australia, managing director Alva Devoy08 is taking a similar approach. The US $380.9 billion manager, offers a 24-hour employee assistance program through an external vendor.

But it has added additional training sessions for its staff to support their wellbeing.

Fidelity Australia engaged an external coach to offer resilience training to some of its employees, with the aim of making this more widely available “We recently ran a ‘pause for breath’ session for our senior leaders with a coach to ensure we are bringing our best selves to our teams during this unprecedented period,” Devoy says.

Light at the end of the tunnel The current work from home conditions may spark long-term changes in work patterns, in what could ultimately achieve better mental health for employees and employers.

The reported rates of mentalill heath in the financial services industry is of great concern to me.This topic wasn’t something spoken about openly many years ago but thankfully it is now.

Ian Macoun

Some leading business figures have indicated that COVID shutdowns and the consequent mass test-run of business continuity plans businesses are forcing them to reconsider their operating models.

Barclays chief executive Jes Staley recently told British reporters that the bank was rethinking its long-term “location strategy” and housing of staff in expensive city buildings, as 70,000 of its employees currently work from home.

Indian IT services giant TCS has already said it will move 75% of its roughly 350,000 employees to work from home by 2025, its global human resources head Milind Lakkad told ET Now. Closer to home, AustralianSuper chief investment officer Mark Delaney indicated a rethink of its investments in city office buildings post COVID, at a recent round table held by QIC. “There’s a whole bunch of CBD buildings that are currently unoccupied,” he said.

“Will people need that same allocation of CBD office space in five years’ time if we start getting very comfortable with the idea of people sitting on Zoom meetings and working at home?

I don’t think we’re talking enough about that.”

At a cursory glance, if work-from-home was to become the new normal, businesses and their shareholders would benefit from lower expenses.

Meanwhile employees could be saved long commutes, which for Australian city workers have blown up from an average of 3.7 hours every week in 2002 to 4.5 hours in 2017, according to the Household, Income and Labour Dynamics in Australia (HILDA) survey.

This extra 4.5 hours a week is time Aussies could spend with their family and friends and undertaking personal pursuits that contribute towards their wellbeing.

It remains to be seen if the current sentiment will carry into the post-COVID world but already thinking of making changes at his firm, taking note of its wellness benefits for his employees.

“As a society, we have naturally focused on the negative sides of the things with COVID,” McGing says.

“On the positive side, we have seen other people’s kitchens and [home] desks and now the perspective that there needs to a separation between work and life seems a bit artificial in a sense. And the industry is generally more accepting of that.

“I hope as elements of that, we will be a little less stressed, less anxious about making the mega bucks or getting the next shiny car.”

McGing’s firm previously allowed its employees one day a week to work from home.

“We will probably continue to work from home two or three days a week,” he says.

“But we will make sure we are in the office when its important, like when we are meeting clients face to face because that is a great thing to do.” fs

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20

News

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Centuria buys stake in NZ peer

01: Andrew Polson

chief executive Frontier Advisors

Ally Selby

ASX-listed real estate investment manager Centuria Capital has acquired a 19% stake in a New Zealand-based peer, set to fork out up to NZD$23.6 million for the deal.

The $7.2 billion firm has agreed to acquire the stake in listed real estate manager Augusta Capital at $0.55 per share, with the opportunity to increase its holdings to 24.99% through an entitlement offer.

The acquisition is Centuria’s first foray into the offshore market, demonstrating the firm’s confidence in the New Zealand commercial real estate sector, it said.

It comes as Augusta undertakes a NZD$45 million equity raise to strengthen its balance sheet in the current environment.

The maximum commitment offer Centuria will make is approximately NZD$23.6 million, funded by its cash reserves. Following the transaction, the manager will have $120 million in cash reserves.

Following the agreement, Centuria will be appointing a director to the board of Augusta.

Centuria joint chief executive John McBain said the acquisition would provide the fund manager to grow a presence in the New Zealand market. fs

Top asset consultants named Eliza Bavin

P The quote

One size fits all advice simply won’t cut it in this market anymore.

AZ NGA acquires national practice AZ Next Generation Advisory (AZ NGA) has acquired a material interest in a risk advice business with offices in Sydney and Brisbane.

Certe Wealth Protection is a specialist risk insurance advice business that currently employs four advisers and seven support staff. It has approximately $16 million of inforce premium.

The deal included a cash payment of 51% upfront a share swap of 49% of Certe Wealth Protection for AZ NGA shares, with a progressive buy-back of these shares.

AZ NGA chief executive Paul Barrett said Certe Wealth’s business model positioned it strongly for growth.

“Certe Wealth exemplifies the characteristics we seek in SME partners including a distinct area of specialisation, strong client relationships and the capacity and capability to grow,” he said.

“Risk specialists are becoming rarer and rarer, but Jeremy and his team are passionate about being their clients’ trusted adviser for all life insurance-related matters.”

Certe Wealth Jeremy Boller founded the firm in 1996. “We got to a size and stage where we needed the capital and support of a large, experienced partner to help us capitalise on opportunities and cement our place in this emerging advice profession,” he said.

“The COVID-19 crisis reinforces the relevance and importance of life insurance. At this time, we are more active than ever. We are calling our clients, checking that they are okay and reassuring them that they are covered should something go wrong. We are not sitting back and crossing our fingers that clients don’t cancel their policies.”

He added that in recent times the number of risk specialist advisers has dwindled - which is a challenge and opportunity for the firm. fs

eter Lee Associates has released the results of its investment management survey naming Australia’s top ranked asset consultant.

Willis Tower Watson and Frontier Advisors share the top spot this year after surveying around 100 chief investment and chief executive officers, as well as other institutional investors.

Peter Lee Associates managing director, Sandhya Chand, said the company observed a shift in this year’s results as the sector has re-shaped.

“There has been more movement of investors between advisors in recent years than we have seen before,” Chand said.

“There is also a growing divergence in the types of investors we now talk to and asset consultants are having to adjust to a range of needs and client types.”

Chand said the discussions the company had this year reflect the fact investors want proactive and tailored engagement from their advisors.

“One size fits all advice simply won’t cut it in this market anymore,” she said.

“The strong results Frontier has achieved over the last five years show the firm has responded to this shift. In particular, the capability of their consultants and their technology solutions have again resonated well with investors this year.”

In the Relationship Strength Index (RSI), which sums and weights the most important attributes respondents’ rate in their asset consult-

ant, Frontier and Willis Tower Watson shared the number one spot.

Frontier chief executive Andrew Polson01 said the company’s client base has evolved enormously in recent years.

“Almost half of our clients now come from outside the superannuation arena and two thirds have portfolios that are sub $5 billion,” he said.

“Frontier has re-calibrated our approach to facilitate ways to work with our clients by using technology as a support to personalised and tailored service that fits the needs and unique environment of each business we work with.”

WTW head of Investments, Martin Goss, noted the firm’s strong survey results and said he was delighted to see Willis Towers Watson return to the forefront of asset consultants in Australia.

“We have seen our ratings improve in each of the last two years, and are delighted to note our top rankings in international manager research, capital markets research, risk advice and assessment, and dynamic/tactical advice,” Goss said.

“Indeed, we ranked first or second in every sub-category of the survey’s RSI measure.”

Goss said the industry continues to develop and WTW have made significant changes to its business over the last few years, including a strong focus on governance advice, and delegated investments. fs

ESG-themed funds fall short of expectations Elizabeth McArthur

A low carbon designation was awarded by Morningstar to funds with a low carbon risk score for their whole portfolios and a low level, below 7%, of fossil fuel exposure.

Two ethical-themed funds - AXA IM Sustainable Equity and AMP Capital Ethical Leaders missed out on the low carbon designation despite their ESG objectives.

The AXA fund has a 7.06% exposure and the AMP Capital fund has a 7.26% exposure, each just shy of the 7% threshold Morningstar requires for a low carbon designation.

“AXA IM Sustainable Equity uses a systematic low volatility and quality-factor investing process for a strongly diversified portfolio that incorporates lower carbon-risk scoring but does not totally eliminate fossil-fuel exposure,” the Morningstar report noted.

“AMP Capital Ethical Leaders International Share is a multimanager strategy with an ethical charter by which underlying managers must abide.”

AMP Capital Ethical Leaders reduced its threshold for fossil fuels from 20% to 10% in April 2019 but Morningstar noted that AMP Capital was considering further limiting that exposure.

The threshold for fossil fuels within the charter was reduced from 20% to 10% in April 2019 (but at the time of writing, AMP Capital was considering further limiting that exposure).”

The strategy with the lowest carbon-risk score in the world

large category is IFP Global Franchise, a fund that does not have an ESG-focused objective. Looking at Australian large equities strategies separately, again funds with no specific ESG theme received the strongest low carbon designations.

Hyperion Australian Growth Companies, AB Managed Volatility Equities, Investors Mutual All Industrials Share were the top three in terms of carbon risk score in the large equities category.

“Hyperion’s quality and long-term growth focus leads to an overweight to the healthcare and technology sectors that have low-carbon risk, while having virtually no exposure to materials and energy.” Morningstar said.

“Whilst we note that Hyperion Asset Management has a detailed ESG Policy and Framework, its low-carbon risk score was an outcome of their process rather than an intended objective.”

The Pendal Ethical Australian Share fund did not meet Morningstar’s low carbon designation despite an ethical investing objective. The fund has a fossil fuel exposure of more than 17%.

“Pendal Ethical Australian Share’s PDS refers to exclusion of investment in companies mining uranium for weapons manufacture, alcohol or tobacco, gaming, weapons, or pornography,” the report said.

“The fund seeks exposure to companies offering leading environmental and social practices, products and services and as of 31 March 2020, BHP makes up more than 5% of that portfolio.” fs

Products

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

21

Products 01: Kerr Neilson

Platinum funds downgraded at Morningstar Two funds from Platinum Asset Management were downgraded to bronze at Morningstar.

The funds downgraded are the $8.5 billion Platinum International Fund and its P class, and the $39 million Platinum Global Fund.

The biggest, the Platinum International Fund is still backed by an experienced investment team but has faced setbacks from process missteps, team evolution and fees, Morningstar said.

“Impressive leadership ensures our support, but Platinum International’s patchy track record at using its many investment tools and a weakened team leave our conviction dimmed on this longstanding strategy,” Morningstar said in a note.

Platinum recently emerged as one of the bestperforming funds in a Morningstar report during the COVID-19 volatility.

However, despite the downside protection, its process setting requires many investment settings to be right to consistently beat the benchmark, Morningstar said in a note yesterday.

“For example, a near 40% underweighting the US over five years to 31 Dec 2019 has proved costly. The team has also struggled to demonstrate a strong and sustainable shorting skill set,” Morningstar said.

Kerr Neilson 01 is still heavily involved in the analysis but the total assets are roughly split as 70% to Andrew Clifford and 30% to Clay Smolinski, according to the note.

“While we still applaud the analyst research overall, they have slipped from being one of the best global equity teams in our view,” the note said.

Colonial First State closes global fund The Acadian Diversified Alpha fund will no longer be available to investors, with switches and redemptions from the fund suspended as of March 20.

The fund had US$12.6 million in AUM as of March 31.

CFS said applications received after 3pm on March 19 would not be processed in what it says is in the best interests of its members.

Any applications for the fund after this date will be invested in Colonial First State’s Wholesale Strategic Cash option.

“We’ve decided to terminate Acadian Diversified Alpha in accordance with the constitution on the basis that it is in the best interests of members having regard to recent market volatility including a depreciation in the Australian dollar and decline in value of some of the underlying securities,” it said.

The wealth manager has also terminated the investment options in Wholesale Mezzanine (Class A) and FirstChoice Wholesale Investments, effective March 23. Options in its FirstChoice Wholesale Personal Super and FirstChoice Wholesale Pension were also closed on April 28.

The Acadian Diversified Alpha fund was a global, absolute return, long/short equity strategy.

Northern Trust touts new ESG tool The fast-growing custodian is pitching a new ESG analytics tools to local superannuation funds and asset managers to track, compare and benchmark their ESG score.

Northern Trust, which is best known in Australia as custodian to a number of public sector funds, also currently provides ESG analytics on the risk side for pension funds and asset owners.

“We have provided specific customised solutions for larger pension funds in US and Europe but that is tailored to their particular board management and deliverables. This [tool] spans the globe and is for asset owners and managers,” Northern Trust product lead – investment accounting and analytic solutions Serge Boccassini told Financial Standard.

It will help funds monitor their changes to their fund profiles, how they compare against benchmarks (including UN PRI principles), and give an insight into ESG scores and exposures in the investment portfolio.

According to the manager’s website, it “seeks to exploit both the fundamental mispricings and the mispricing of risk in the cross section of equities through our proprietary multi-factor stock selection process”.

The strategy shorted weak high-beta stocks and bought low-beta stocks with strong fundamentals in developed markets, investing in both equities and derivatives.

Over the past year to March 2020, the fund returned -17.4% gross and -18.3% net. Since its inception, the fund netted an annual return of -5.9%.

The Diversified Alpha strategy returned -3.7% net of fees for the month of March, with the fund manager blaming the COVID-19 pandemic for the losses.

“The quickening spread of the coronavirus this month sharply altered the global economic outlook,” Acadian said.

“We continue to believe in the value of our systematic process that invests at the intersection of attractive factors with additional exposure to the mispricing of risk, and that it is important to remain focused on the fundamental basis of stock selection in environments like this.”

Global manager reduces fees T. Rowe Price has slashed management fees on its Australian Unit Trust Global Equity Fund (I Class) from 1.18% to 0.94% per annum, effective from July 1 this year.

Management fees for the firm’s Global Equity Fund (Hedged) (I Class) will also be reduced in the new financial year, from 1.2% to 0.99% per annum.

The new management fee aligns the portfolio with other T. Rowe Price offerings, the manager said, including its Australian Equity Fund (0.60% p.a.) and its Dynamic Global Bond Fund (0.40% p.a.), which have both been competitively priced for the post Royal Commission and FOFA environment.

The government’s changes to end grandfathered provisions for conflicted remuneration will come into effect from 1 January 2021. With this change, the full effect of the FOFA laws will come to fruition, banning advisers from receiving conflicted remuneration entirely.

T. Rowe Price Australian sales manager Darren Hall2 said the management fee change would benefit both advisers and their clients.

“Putting client interests first is a core value of our firm and a key determinant influencing our decision making,” he said.

“We are very pleased to offer a highlycompetitive new fee structure, which assists advisers to meet their ‘best interest duty’ and provides a more attractive entry point to end investor.

“As the industry transitions away from legacy systems and processes, modern structures are evolving around how to support investors achieve their capital and income needs, and we are pleased to be working well ahead of

02: Michael Ohanessian

the government’s year-end timeline for cleaner remuneration arrangements.”

The $3.4 billion global equity fund has been managed by Scott Berg for over eight years, and was recently awarded a gold rating from Morningstar, the firm said.

As of March 17, T. Rowe Price’s global equities fund was invested in 150 stocks across 30 countries.

Praemium adds Chi-X products Financial advisers using Praemium now have access to Chi-X’s suite of funds, TraCRs and warrants.

Praemium has become the latest wealth management platform to recognise the popularity of Chi-X’s range of products, after Powerwrap made the firm’s range of TraCRs and funds available to advisers and their clients earlier this month.

The full suite of Chi-X TraCRs, funds and warrants are accessible through Praemium’s non-custodial virtual managed accounts platform (VMA), providing advisers with opportunities across a range of asset classes, including equities, indices, currencies, commodities and fixed income.

Praemium chief executive Michael Ohanessian 02 said it was important for advisers to have access to a “broader” range of products as they aim to deal with the portfolio impacts of COVID-19.

“As capital markets endure significant volatility and the economic outlook remains uncertain, the role of financial advisers has never been more important. A broader product suite helps our advisers provide a greater choice of investments to suit their clients’ individual needs,” Ohanessian said.

“The addition of Chi-X TraCRs and active ETFs to our VMA service will enable financial advisers and their clients to access new investment options on Chi-X Australia.”

Ohanessian pointed out the “startling rise” of Praemium’s VMA administration services (VMAAS), which exceeds $10 billion funds under advice and allows advisers to add the new Chi-X options without introducing additional administration burden.

Chi-X chief executive Vic Jokovic said there were parallels between the approaches of the two firms.

“Innovation is at the heart of Praemium’s business and is also the driving force behind Chi-X Australia. We are pleased to be able to expand our offering of TraCRs, funds and warrants to a growing network of financial advisers who understand the changing needs of their clients when it comes to asset allocation and portfolio construction,” Jokovic said.

“Managed accounts have become a significant part of the financial advice experience and Praemium is driving innovation in that area with its virtual managed accounts platform. Chi-X investment products are ideally suited to advised clients who appreciate the value of innovative investment solutions.” fs

22

Roundtable| Investment Featurette

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Analysts share COVID-19 investment tips Despite investors not reaping similar benefits of rebounds seen abroad, analysts still believe there are plenty of opportunities down under - you just have to focus on finding them. Ally Selby writes.

With global markets rocking one way and the other in the last two months, it’s not too far a stretch to imagine investors are feeling a little bit seasick, or at the least dumbfounded.

Despite a recession knocking on the world’s door, investors keep looking beyond the doom and gloom to push global bourses higher, with US markets now roughly up 30% since their March 23 lows.

Since markets hit their bottom, the S&P/ASX 200 had only risen around 20% as of May 1, with the pandemic’s impact on our big four banks pulling the index back.

And while investors may not have reaped similar benefits to the rebounds seen abroad, analysts still believe there are plenty of opportunities down under; you just have to focus on finding them.

To do this in the current environment, investors must remain nimble, according to Marcus Today chief operations officer Chris Conway01.

“The best broad advice I can give is to stay active and be prepared to alter your thinking as new information comes to hand,” he says.

“Things have been changing so fast that good ideas can quickly look foolish.

“You need to be able to admit you’re wrong when you are, and have the courage to push an advantage when you have one.”

It’s not about being right in the long term, he

explains, but about making money wherever you can and on any time frame that allows.

To find this alpha during the COVID-19 crisis, Shaw and Partners senior investment adviser Adam Dawes recommends buying quality companies with good balance sheets.

“Buy quality when the market is down and don’t be a hero,” he says.

He argues investors have been ignoring warnings of economic downfall to push markets higher.

“The economy is telling us one thing – GDP and unemployment are at their worst in history – but the market is happy to buy and is heading higher. So I don’t know if I am bullish or bearish,” Dawes says.

“It reminds me of a saying ‘Don’t Fight the Fed’; with combined fiscal and governmental stimulus around the world pushing traders to keep buying despite the economic red flags.”

Investors should look to PMI data as a key indicator of growth, he says.

“Growth will only start as the world gets back to normal,” Dawes says.

“So the key indicator is now how long it will take and how it will look in this new world. PMI data will be the key – keep your eye on this indicator.”

Conway says he has just started to become a little more bullish once again.

“The market had the big selloff (which we

The key indicator is now how long will it take and how it will look in this new world.

PMI data will be the key – keep your eye on this indicator.

Adam Dawes.

thought was overdone), the sharp snap-back (probably also a little overdone) and now it seems to be entering a ‘reality check’ period,” he says.

“Things will be driven more by economic data, company results and medical/scientific information regarding the pandemic rather than sentiment.

“The reason why we are a little more bullish recently is that we expect the market to get a bit of a bump as economies reopen.”

Investors won’t be able to pick up stocks at a bargain when things go back to normal, he warns.

“By the time we’re all heading back to work it will be too late and the opportunity will have passed,” Conway says.

“All told, there is no one key indicator we are looking for. It’s a combination of all of the above factors and the understanding that we will have to move quickly whenever opportunities and threats present themselves.”

Despite rising bourses, A Rich Life founder Claude Walker says he is still as bearish now as he was at the end of February.

“Right now the market is supposedly looking through the lockdowns and seeing a brighter future when economies get back to work,” he says.

The local market hasn’t rebounded in a similar vein to its global counterparts, as the Reserve Bank of Australia has not done as much as the US

Investment | Featurette

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Federal Reserve to bolster asset prices, he says.

Australia’s health and fiscal responses, on the other hand, have so far been superior, Walker says.

“My guess is that ultimately Australia will continue to be a strong economy with a strong market, but I think investing in the ASX has an unusually high level of risk right now,” he explains.

Rising stock prices have been influenced almost completely by increased liquidity from the Fed, he says.

“Billions of dollars are being pumped into the financial system and that is pushing up financial asset prices,” Walker says.

“Meanwhile interest rate cuts around the world are increasing the value of future earnings in present-day dollars, pushing up valuations (all else being equal).”

Yet, for the majority of companies, growth is not on the horizon, at least in the short to medium term.

“I have positioned my portfolio to benefit from companies that can grow in the current environment,” Walker explains.

“For example, I own a large position in Whispir which helps companies and governments communicate with customers and citizens digitally.”

The main movement in Walker’s portfolio in the last few months has been increasing cash and gold reserves. He has also shorted tourism related stocks, as well as AI provider Appen.

“The reason I bought some Appen shares is because they serve clients like Google and Facebook that have the financial strength to spend throughout this time, no matter what,” he says.

“Having said that, like all businesses, Appen could be impacted by a recession, which I think is likely and will be severe.”

Despite the threat of a global recession, Walker says there is still plenty of opportunity in markets, but that opportunity comes at a much higher risk than when there wasn’t a global pandemic.

“The truth is – no one knows how or when the world will properly overcome this pandemic,” he says.

“My guess is that markets are taking an overly optimistic view of how easy it will be to recover from this, just as they took an overly optimistic view (in February) of China’s ability to contain the coronavirus. I hope I’m wrong.”

Bell Direct market analyst Jessica Amir02 says investors, both institutional and retail, had been focused on companies with the most upside during the COVID-19 crisis.

“The biggest obstacle for investors right now is that EPS is expected to drop, both this year and next,” she says.

“So to drive portfolio growth, institutional and retail investors are focusing on the companies with the most upside – the ones that have growing cash flows and low debt, so they can weather the storm and continue to pay shareholders dividends.”

The companies with these attributes have continued to outperform their peers during the COVID-19 crisis, she says.

“That’s why, since we entered a bear market, utilities, healthcare, consumer staples and some

01: Chris Conway

02: Jessica Amir

03: Julia Lee

chief operations officer Marcus Today

market analyst Bell Direct

chief investment officer Burman Invest

materials (mining stocks) have outperformed the market,” Amir says.

“On the other hand, those that are abandoning their earnings forecasts or deferring dividends to preserve capital have come out of favour.”

These include businesses that are thriving in the current environment, such as Telstra, Woolworths and Coles. While companies like Fortescue Metals have an attractive dividend yield, Amir says.

She recommends investors look to companies that performed well following the GFC, like software companies, packaging, consumer staples, metals and mining. She argues banks and retailers will likely outperform once restrictions ease.

Retirees seeking income could benefit from a few of these sectors, Burman Invest founder and chief investment officer Julia Lee 03 says.

Consumer staples like supermarkets, utilities such as APA Group, and miners such as gold and iron ore companies offer the best opportunities for income at the moment, she says.

Despite it being a difficult market for even the seasoned investor, she recommends now is a perfect time for younger, millennial investors to start learning.

“I’d start with larger companies with at least a $800 million market capitalisation first for beginner investors,” Lee says.

“For any investor starting out, it’s understanding that it will take some time to develop a successful strategy and be willing to invest the time and money to be able to generate consistent returns.”

Lee has been buying gold stocks; like Silver Lake Resources and Evolution Mining, and food stocks; like Elders Resources and Bega Cheese. After their capital raisings, NAB and QBE Insurance also look attractive, Lee says.

Similarly, Amir believes younger investors have been presented with an extremely rare opportunity to buy great companies at a discount.

“The road ahead could get bumpy, but over the long term, we know markets have always recovered,” she says.

“The best thing to do is get started and regularly invest a portion of your pay or savings into the market, maybe each month or fortnight.

“We can’t pick the bottom. No one can. So this is the best way to de-risk timing the market, while also combining the power of compounding.”

Dawes also believes there is opportunity in the market for those starting out.

“For younger investors this is a fantastic time to invest in a once in a decade opportunity,” he says.

“Even if this market has another dip it will provide opportunity and longer term growth.”

He likes energy stocks and companies that have been hit unfairly by the crisis, like Transurban Group.

For those looking for income, like retirees, he recommends investing in the ASX, APA Group, and Wesfarmers.

“Banks have been the go-to for income but this has dramatically changed and will continue to be challenged for the next two years,” Dawes says.

“So you need to look a bit more strategically for that income.”

The saying goes that the best time to buy property was 10 years ago.

It’s crude but it’s apt, and it’s the same as the stock market.

Chris Conway

23

Walker, on the other hand, believes investors should be patient.

“Personally, I think this is a reasonably fraught time to be investing, and I suspect we will get better buying opportunities if property prices and rents fall in Australia,” he says.

“The leading indicators are very negative but we haven’t yet seen that happen. With banks delaying repayment obligations there are very few forced sales.”

However, certain businesses may benefit from ongoing social distancing measures, he says.

“While some of these stocks have already absolutely flown (for example Marley Spoon, which I own some shares in, but consider overvalued) others are trading at lower levels than before the pandemic, such as 3P Learning, which I also own, and consider to be relatively cheap,” Walker says.

“My view is informed by the fact that, even if we control COVID-19, or vaccinate against it, we will still be ‘on guard’ for ages given we won’t want it to return.”

Conway believes investors young and old should be looking for opportunities in the market right now.

“The saying goes that the best time to buy property was 10 years ago. It’s crude but it’s apt, and it’s the same as the stock market,” he says.

“Any young person should be looking to invest as soon as possible, for the simple reason of compounding. The earlier one starts, the more they will have.

“With regard to the current market weakness, anytime you can buy quality assets at depressed prices you should be investing as much as possible within your means.”

He has been focused on “recovery stocks” – those that are going to bounce back when things go back to normal, like Aristocrat Leisure, Tabcorp, Nine Entertainment, Appen, Goodman Group and oil companies.

“Coming off the bottom, we were really just buying anything which had been smashed, but now we are being far more picky with our stock selection, knowing that there will be pockets of the market and themes which fare better than others,” Conway says.

Retirees searching for income have been forced further up the risk curve in the current environment, but there are still opportunities for quality yield on the ASX, he says.

“There remain strong utility and property companies on the ASX which deliver quality yields – that is they are healthy and sustainable,” Conway says.

“The key part of the equation is sustainability, which unfortunately has been made increasingly difficult to get a handle on due to COVID-19 and many companies suspending/cancelling their dividends.

“If possible, investors should try to look through this period and make sure the underlying business remains sound, i.e. stable revenues, low debt, sustainable competitive advantage – all the typical things that make up a good business.” fs

24

Between the lines

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Commsec Adviser Services sold

01: Alex Wade

chief executive AMP Australia

Elizabeth McArthur

The Commonwealth Bank has entered into an agreement to sell AUSIEX, which trades as CommSec Adviser Services, to a Japanese firm.

Nomura Research Institute, a Japanese technology solutions and business consulting firm, has entered into an $85 million in cash sale agreement with CBA. The transaction includes the broking operations, licence and assets of AUSIEX. AUSIEX is CommSec’s wholesale investor arm, providing trading and execution services to financial advisers and brokers.

CBA said CommSec, its retail broking business, remains core to its strategy and will be retained.

“AUSIEX is a strong business and its clients and employees will benefit from NRI’s investment and ambition to be the market leader in wholesale broking and portfolio administration services,” CBA executive general manager of CommSec Richard Burns said.

The AUSIEX divestment excludes the Accelerator Cash Account and investment lending products which are offered under the CBA banking licence, and will continue to be offered by CBA. “We are pleased that AUSIEX and its highly experienced and well-respected team, will be joining our group,” Nomura Research Institute chief executive Shingo Konomoto said.

“We have great ambitions to grow the business and are focussed on empowering employees and delivering long-term value for institutional and advised clients.”

The transaction is expected to be completed in the first half of 2021. fs

AMP hangs on to AFLPA super mandate Kanika Sood

A The quote

This new agreement is strong recognition of the quality, competitiveness and security of AMP’s workplace superannuation offer.

MP will continue to manage superannuation for over 3500 past and present AFL players as the association extends its mandate.

AFL Players’ Association (AFLPA) has extended its 20-year-long relationship with AMP after a review following which the association decided AMP’s offering was best placed to service the unique needs of current and past AFL players, according to AFLPA chief executive Paul Marsh.

“After an extensive independent review process, the AFLPA Board made the decision to continue with the AFL Players’ Association’s longstanding partnership with AMP,” Marsh said.

“Through the review it was clear that AMP’s super fund was the preferred option to support the unique requirements of AFL players.”

In renewing AMP, AFLPA is taking a different stance from the AFL Fund, which last December notified members of its plans to replace AMP with

Rainmaker Mandate Top 20

industry fund Hostplus starting February 28.

In June last year, AMP lost its mandate as default fund for Australia Post to AustralianSuper.

AMP Australia chief executive Alex Wade01 said he was delighted to be continuing AMP’s long-term partnership with the AFL Players’ Association.

“This new agreement is strong recognition of the quality, competitiveness and security of AMP’s workplace superannuation offer,” Wade said.

“The quality and flexibility of AMP’s insurance offer, competitive investment management fees and insurance premiums, investment performance, diversified MySuper portfolios, and AMP’s comprehensive financial wellness and education programs, were all identified by the AFLPA as reasons for their decision.

“AFL football is an important part of so many people’s lives, and we’re committed to helping players manage their unique career and income profiles, and build sustainable long-term wealth.” fs

Note: Selected cash and bond investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

Alcoa of Australia Retirement Plan

JANA Investment Advisers

Ardea Investment Management Pty Limited

Fixed Interest

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Cash

361

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Ardea Investment Management Pty Limited

Fixed Interest

110

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Cash

70

AustralianSuper

Frontier Advisors; JANA Investment Advisers

IFM Investors Pty Ltd

Cash

127

Care Super

JANA Investment Advisers

Apollo Global Management, LLC

Global Fixed Interest Credit

151

Care Super

JANA Investment Advisers

Marathon Asset Management (Australia) Limited

International Fixed Interest

69

Construction & Building Unions Superannuation

Frontier Advisors

Self

Australian Fixed Interest

39

First State Superannuation Scheme

Willis Towers Watson

Oaktree Capital Management, LLC

International Fixed Interest

Hostplus Superannuation Fund

JANA Investment Advisers

JANA Implemented Consulting

Global Fixed Interest Diversified

38

Hostplus Superannuation Fund

JANA Investment Advisers

Bentham Asset Management Pty Limited

Global Fixed Interest

36

Intrust Super Fund

JANA Investment Advisers

Western Asset Management Company Pty Ltd

Fixed Interest

68

legalsuper

Willis Towers Watson

Macquarie Investment Management Australia Limited

International Fixed Interest

207

legalsuper

Willis Towers Watson

Macquarie Investment Management Australia Limited

Australian Fixed Interest

202

Local Authorities Superannuation Fund

Frontier Advisors

Brandywine Global Investment Management, LLC

Fixed Interest

297

Local Authorities Superannuation Fund

Frontier Advisors

Amundi Asset Management Australia Limited

Australian Fixed Interest - Diversified

199

Local Authorities Superannuation Fund

Frontier Advisors

Amundi Asset Management Australia Limited

International Fixed Interest

199

Maritime Super

JANA Investment Advisers; Quentin Ayers

IFM Investors Pty Ltd

Australian Fixed Interest

69

Maritime Super

JANA Investment Advisers; Quentin Ayers

IFM Investors Pty Ltd

Cash

48

Sunsuper Superannuation Fund

Aksia, JANA, Mercer, StepStone

Ardea Investment Management Pty Limited

Cash

Amount ($m) 60

313

200 Source: Rainmaker Information

International

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Lloyds profits down 95%

01: Jeff Bezos

founder Amazon

Elizabeth McArthur

UK bank Lloyds reported a profit plunge of 95% compared to the first quarter of 2019 in its latest results.

The significant dive in statutory profit was impacted by an impairment charge which occurred due to changes in Lloyds Banking Group’s reporting assumptions given the “expected deterioration in the UK economy” as a result of COVID-19.

Lloyds’ underlying profit was £558 million compared to more than £2.1 billion in the first quarter of 2019. The bank’s underlying return on tangible equity was 4.7%.

The total impairment charge due to the bleak economic outlook was £1.43 billion.

Part of the impairment comes from the bank putting aside money to cover loans that it expects will not be paid.

“The coronavirus pandemic presents an unprecedented social and economic challenge which is having a significant impact on people and businesses in the UK and around the world,” Lloyds Banking Group chief executive António Horta-Osório said.

“The economic outlook is clearly challenging with the longer term outcome dependent on the severity and length of the pandemic and the mitigating impact of government and other measures in the UK and across the world.”

He said the bank was working with government and regulators to support the UK economy and commended staff for providing virtual banking services to those in need.

Lloyds did report a trading surplus of £1.98 billion, a reduction of 19% compared to the first quarter of 2019, but an increase of 7% on the final quarter of 2019. fs

UK government loses case Jamie Williamson

The UK government lost a high profile court case against the Palestine Solidarity Campaign over whether local council pension schemes can make investment decisions that go against the country’s foreign or defence policy.

The UK Supreme Court ruled that the government’s investment strategy guidance issued in 2016 which bans boycotts or sanctions against foreign countries or defence companies was unlawful.

The guidance, issued to 89 pension funds overseeing the retirement savings of more than five million people, said local council pension schemes should not use pension policies to pursue divestments or campaigns of any kind against foreign nations or UK defence industries.

The Department for Communities and Local Government, which issued the guidance, does allow some ethical investments when it comes to the environment. However, for example, pension funds are not permitted to boycott investments in companies on the grounds that they trade on products produced in Palestine-occupied territories.

One of the Supreme Court justices said investment decisions are judgments to be made by the “administering authority, not by the secretary of state”.

The court case had been ongoing since 2017, and the Palestine Solidarity Campaign had initially won in the High Court, but lost in the Court of Appeal. fs

25

Billionaires club rakes in cash amid COVID-19 crisis Ally Selby

S The quote

This unprecedented wealth surge is larger than the Gross Domestic Product of Honduras, US$23.9 billion in 2018.

ince the beginning of the year, America’s wealthiest billionaires have seen their wealth increase by millions, with eight seeing their net worth surge by more than US$1 billion dollars.

The latest research from the Institute for Policy Studies revealed the “pandemic profiteers” that have benefited from plummeting tax obligations amid the COVID-19 crisis.

Amazon founder Jeff Bezos01 was one such billionaire, whose fortune increased by an estimated $39.3 billion (US$25 billion) as of April 15.

“This unprecedented wealth surge is larger than the Gross Domestic Product of Honduras, US$23.9 billion in 2018,” the Institute for Policy Studies said.

Similarly, Tesla chief executive and SpaceX founder Elon Musk saw his wealth rise by $7.9 billion (US$5 billion) during the COVID-19 crisis.

Jeff Bezos’ ex-wife MacKenzie Bezos also saw her wealth increase (US$8.6 billion), as did Zoom founder and chief executive Eric Yuan (up US$2.6 billion), former Microsoft chief executive Steve Ballmer (up US$2.2 billion), Silicon Valley real estate mogul John Sobrato (up US$2.1 billion), Apollo Global Management co-founder Joshua Harris (up US$1.7 billion)

and Mediacom founder Rocco Commisso (up US$1.09 billion).

The Institute for Policy Studies pointed to decreasing tax obligations for the surge in billionaire wealth.

“Between 1980 and 2018, the taxes paid by America’s billionaires, measured as a percentage of their wealth, decreased 79%,” it said.

“Over this same period, the billionaire share of America’s increased wealth has grown substantially. Between 2006 and 2018 alone, nearly 7% of the real increase in America’s wealth went to the country’s 400 wealthiest households.

“If this inequality isn’t treated with both short and long-term tax reforms and oversight, America’s ‘pre-existing condition’ of extreme inequality could overwhelm not only our economy, but our democracy itself.”

As part of the emergency response to the pandemic, the institute recommended a crackdown on billionaires.

This includes: enacting an excess profits tax, as well as a 10% income tax; stopping billionaires from hiding their wealth in offshore tax havens; limit tax breaks for charitable donations and creating a charity stimulus; and creating a progressive estate and wealth tax. fs

BlackRock turns optimistic on credit Kanika Sood

Central bank action including buying corporate bonds combined with cheapened valuation has led BlackRock Investment Institute to upgrade credit to a modest overweight.

BlackRock’s latest six to 12 month tactical views on major global asset classes (in USD terms) are now neutral for all global asset classes (equities, government bonds and cash) except credit, which it upgraded in April.

“We are mostly sticking to benchmark holdings on an asset class level; prefer credit over equities; and favor rebalancing into the risk asset decline,” it said in a research note led by BlackRock Investment Institute head Jean Boivin.

On credit, BlackRock thinks the temporary liquidity issues could be helped by central bank actions but the valuations have come down for the asset class.

“We have upgraded credit to modestly overweight.

Extraordinary measures by central banks – including purchases of corporate debt –provide a favorable backdrop. Developed market central bank actions should pave the way for lower volatility in interest rates, providing a stable environment for credit spreads to narrow,” Boivin said in the note.

“The risk of temporary liquidity crunches remains. Yet valuations have cheapened and coupon income is crucial in a world starved for yield.”

Within equities, its highest conviction overweight is to US stocks while the highest-conviction underweight is to Euro area.

“We are overweight US equities for their relative quality bias

and the sizable policy response to the outbreak: large fiscal stimulus coupled with the Federal Reserve’s commitment to keep rates low and markets functioning,” Boivin said.

“We stay underweight on European equities. We see greater upside elsewhere in an eventual recovery. Europe is more dependent on foreign trade.”

Japan equities are underweight (limited fiscal and monetary policy room for its central bank) while EM equities are neutral (cheaper valuations but COVID-19 is testing public health care systems and cheaper oil may challenge some EM economies).

BlackRock Investment Institute’s views on EM local currency debt have changed, as it downgrades the asset class to neutral from previous overweight as compared to broader global asset classes. “[This is] because we see a risk of further currency declines in key markets amid monetary and fiscal easing. This could wipe out the asset class’s attractive coupon income,” he said.

In fixed income, its highest-conviction overweight is to US Treasuries. It is neutral to overweight on all other fixed income asset classes, except German bonds.

“We like US Treasuries. Low rates reduce their ability to cushion against risk asset selloffs, but we see greater room for long-term yields to fall further in the US than in other developed markets,” Boivin said.

“We remain underweight bunds. They provide little cushion against major risk events, but would not add to our underweight after recent underperformance versus US Treasuries.” fs

26

Managed funds

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09 PERIOD ENDING – 31 MARCH 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

GROWTH

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE

IOOF MultiMix Growth Trust

585

0.2

1

6.0

1

5.5

1

Macquarie Capital Stable Fund

31

6.2

6

5.4

2

4.1

3

Perpetual Split Growth Fund

38

-6.2

4

3.8

2

4.2

2

IOOF MultiMix Moderate Trust

606

0.7

3

4.6

3

4.5

1

Vanguard Growth Index Fund

5248

-3.5

2

3.8

3

4.0

3

BlackRock Scientific WS Diversified Stable

64

1.6

2

4.5

4

4.1

4

Vanguard High Growth Index Fund

2622

-6.2

3

3.5

4

4.0

4

IOOF MultiMix Conservative Trust

697

2.1

4

4.1

5

4.0

5

MLC Wholesale Horizon 6 Share Portfolio

220

-7.9

7

2.8

5

3.4

6

Vanguard Conservative Index Fund

2388

1.4

7

4.0

6

3.8

6

Fiducian Growth Fund

118

-8.4

9

2.6

6

3.7

5

Perpetual Conservative Growth Fund

359

0.5

10

3.3

7

3.1

8

11

-10.3

15

2.3

7

2.9

8

Fiducian Capital Stable Fund

285

-0.9

15

3.0

8

3.0

10

466

-7.0

5

2.2

8

2.8

9

Perpetual Diversified Growth Fund

112

-2.1

5

2.9

9

2.7

12

BT Multi-Manager Growth Fund

38

-9.2

12

2.2

9

2.7

10

MLC Inflation Plus - Moderate Portfolio

581

1.3

9

2.7

10

2.7

13

Pendal Active High Growth Fund

18

-9.5

13

1.5

UBS Tactical Beta Fund - Conservative

108

-0.8

14

2.6

11

2.2

16

Sector average

394

-1.5

2.5

2.8

BT Multi-Manager High Growth Fund MLC Wholesale Horizon 5 Growth Portfolio

Sector average

617

-8.0

10

2.0

2.7

BALANCED

CREDIT

Macquarie Balanced Growth Fund

1886

1.4

2

5.8

1

5.3

2

Metrics Credit Partners Div. Aust. Senior Loan Fund

2329

4.9

2

5.1

1

4.9

1

BlackRock Scientific WS Diversified Growth Fund

727

2.5

1

5.8

2

5.5

1

Vanguard Australian Corp Fixed Interest Index

271

4.5

4

5.0

2

4.3

3

Vanguard Balanced Index Fund

486

-2.2

5

4.8

3

4.6

4

Principal Global Credit Opportunities Fund

145

7.8

1

4.9

3

4.7

2

5054

-0.8

3

4.1

4

4.0

5

Vanguard Australian Corporate Fixed Interest Index ETF 169

4.5

3

4.8

4

519

-4.8

9

3.6

5

2.7

14

Pendal Enhanced Credit Fund

397

4.0

6

4.8

5

4.1

4

83

-5.1

11

3.5

6

3.8

6

PIMCO Australian Short-Term Bond Fund

362

3.8

7

3.6

6

3.0

13

Franklin Australian Absolute Return Bond

323

1.5

9

3.1

7

3.4

8

73

-3.1

24

3.1

8

4.1

5

PIMCO Global Credit Fund

543

1.4

10

2.8

9

3.1

10

Mason Stevens Credit Fund

544

0.8

14

2.7

10

3.5

7

Sector average

728

0.3

2.3

2.8

BlackRock Tactical Growth Fund SSGA Passive Balanced Trust Vanguard Managed Payout Fund Responsible Investment Leaders Bal

31

-5.4

13

3.3

7

1138

-4.6

7

3.1

8

2.7

13

Fiducian Balanced Fund

292

-2.0

4

2.9

9

3.7

8

BT Multi-Manager Balanced Fund

337

-6.4

17

2.9

Sector average

877

-5.6

AMS Balanced Fund

10

2.3

3.0

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Yarra Enhanced Income Fund

Source: Rainmaker Information

Super will never be the same OVID-19 isn’t just a health crisis. It’s C an economic, employment and financial crisis. But on top of that it’s become a super-

Brumbie

By Alex Dunnin alex.dunnin@ financialstandard .com.au www.twitter.com /alexdunnin

annuation policy crisis.

Australia’s world-leading superannuation system with the stroke of a pen went from being a 50-year investment for most fund members to being an ATM when its long investment time horizons were thrown out the window.

Super funds that only a few months ago were lauded by government, regulators and the financial media as investment leaders were suddenly being pilloried.

Headlines questioning trustees’ actions were everywhere. There were even political cartoons mocking them and personal attacks the likes of which the industry has never faced.

Senator Jane Hume accosted trustees, saying that if any of them were to face liquidity concerns they better not come to the government or the Reserve Bank seeking assistance.

You only have yourselves to blame, she said. You should have seen this coming.

At least this rhetoric seemed to calm down when op-eds began appearing in the financial media pleading for assistance for trustee members of SMSFs that may be caught in an income squeeze after the big banks started warning investors they may suspend dividends.

Adding to the frenzy, Senator Andrew Brag,

chair of the Select Committee on Financial Technology and Regulatory Technology, said the Treasurer should deal with any super fund that delayed releasing superannuation money to members. Never mind that this is the law and no super fund said they wouldn’t.

Tim Wilson MP, chair of the Standing Economics Committee, meanwhile summoned super funds to appear before his committee to explain themselves amidst a crisis that turned out not to be.

It’s hard to believe that only a few months ago the government was championing legislation that would write a superannuation system-wide objective into law.

It goes without saying that anyone who dared to even suggest discussing any of these policy changes was publicly attacked. The venom in some of these attacks made it seem a few people were actually hoping some super funds would fail.

This wasn’t schadenfreude. It was downright nasty. With all this going on, it’s hard to accept policy settings will somehow just snapback after COVID-19 to what they were.

Australia’s superannuation trustees now know they have to plan not just for financial market meltdowns but policy meltdowns too.

They have to see into the future to foretell crises that everyone from the World Bank to the United Nations and the White House can’t see.

It’s too early to say how this will impact

super fund trustees’ long-term investment strategies. But at the very least it will make them more cautious. It will also force them to review long-run liquidity risks more brutally.

It will put their ESG programs on steroids.

Just when Australia is going to need every ounce of investment capital its economic arsenal can muster, this is not good news. Suffice to say, it will be a reality check for any politician who was previously hoping super funds might help bankroll a 30-year investment into a coal power station in regional Australia.

Trustees will also need to be factoring in not only financial threats but legislative. That is, what would they do if governments fundamentally rewrote the law.

To cope with this default investment options might need to be recast. Members may be forced to have twin accounts, a long term one complemented with a liquidity one that invests solely into cash and bonds.

Trillions of dollars in investment capital could be lost to the market in the decades to come inadvertently costing taxpayers dearly in extra age pension payments.

And who is going to be lumbered paying the bill for all this on top of having to pay for COVID-19’s economic rescue packages? Australia’s young people. Australia’s luckiest generation, Baby Boomers, have dodged yet another bullet. Giddyup. fs

Super funds

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09 PERIOD ENDING – 31 MARCH 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

GROWTH INVESTMENT OPTIONS UniSuper - Sustainable High Growth

Retirement Products

5.8

1

5.3

5

AAA

UniSuper Pension - Sustainable High Growth

First State Super Employer - High Growth

-2.1

6

5.3

2

5.2

7

AAA

Equip Pensions - Growth Plus

Australian Ethical Super Employer - Growth

-2.5

9

5.1

3

4.1

35

AAA

Australian Ethical Super Pension - Growth

First State Super Employer - Growth

-0.9

3

5.0

4

4.9

16

AAA

WA Super - Diversified High Growth

-2.1

5

4.9

5

4.3

29

ANZ Staff Super Employee Section - Aggressive Growth

-4.3

34

4.8

6

4.9

Media Super - High Growth

-2.9

14

4.8

7

Equip MyFuture - Growth Plus

-5.9

83

4.7

AustralianSuper - High Growth

-3.7

23

NGS Super - High Growth

-3.2

16

SelectingSuper Growth Index

-6.1

5 years

SS

% p.a. Rank % p.a. Rank Quality*

1

12.9

1

9.4

3

AAA

9.5

21

11.7

2

8.2

14

AAA

11.5

3

10.9

3

7.3

38

AAA

Vision Income Streams - Just Shares

9.2

24

10.9

4

8.3

13

AAA

AAA

Media Super Pension - High Growth

11.1

4

10.9

5

8.8

9

AAA

15

AAA

HOSTPLUS Pension - Shares Plus

11.0

5

10.7

6

9.5

1

AAA

5.1

10

AAA

Cbus Super Income Stream - High Growth

9.5

18

10.7

7

9.3

4

AAA

8

4.4

25

AAA

Intrust Super Stream - Growth

8.8

36

10.7

8

8.8

8

AAA

4.7

9

5.4

3

AAA

AustralianSuper Choice Income - High Growth

10.8

6

10.7

9

8.9

6

AAA

4.6

10

5.0

13

AAA

TASPLAN Tasplan Pension - Growth

11.8

2

10.6

10

8.2

15

AAA

SelectingSuper Growth Index

-6.6

2.7

3.3

3.0

3.7

BALANCED INVESTMENT OPTIONS

State Super (NSW) SASS - Growth

2.2

2

5.9

1

5.3

Australian Ethical Super Employer - Balanced (accumulation)

0.9

5

5.6

2

4.8

14

UniSuper - Sustainable Balanced

1.5

3

5.4

3

4.7

Media Super - Growth

-2.1

31

5.0

4

AustralianSuper - Balanced

-2.2

34

4.9

1.2

4

VicSuper FutureSaver - Growth (MySuper)

-0.4

HESTA - Eco-Pool TASPLAN - OnTrack Sustain

UniSuper Pension - Sustainable Balanced

1.9

4

6.2

1

5.4

12

AAA

AAA

Australian Ethical Super Pension - Balanced (pension)

2.1

2

5.8

2

5.0

22

AAA

19

AAA

Media Super Pension - Growth

-1.9

33

5.8

3

6.1

3

AAA

5.3

5

AAA

Australian Catholic Super RetireChoice - Socially Responsible

1.9

3

5.8

4

4.5

35

AAA

5

5.5

2

AAA

PFAP - IOOF MultiMix Balanced Growth Trust

0.9

5

5.4

5

4.8

28

AAA

4.9

6

3.7

49

AAA

AustChoice Super ABP - IOOF MultiMix Balanced Growth Trust

0.8

6

5.3

6

4.7

32

Not rated

12

4.9

7

4.7

16

AAA

AustralianSuper Choice Income - Balanced

-2.7

51

5.3

7

6.0

5

AAA

-2.0

28

4.8

8

5.9

1

AAA

TASPLAN Tasplan Pension - Balanced

-0.6

19

5.3

8

5.3

15

AAA

-0.1

10

4.7

9

AAA

Media Super Pension - Balanced

-2.0

34

5.2

9

5.7

6

AAA

0.0

9

4.6

AAA

Prime Super Superannuation Income Stream - Balanced

-1.5

26

5.1

10

6.1

4

AAA

SelectingSuper Balanced Index

-3.7

-3.4

10

3.0

4.5

4 Not Rated

26

3.4

CAPITAL STABLE INVESTMENT OPTIONS QSuper Accumulation - QSuper Balanced

9.9

1

8.2

VicSuper FutureSaver - Socially Conscious

9.8

2

TASPLAN - OnTrack Control

9.7

3

AustralianSuper - Conservative Balanced

8.5

Energy Super - SRI Balanced

3.2

3.6

CAPITAL STABLE INVESTMENT OPTIONS

1

7.2

1

7.9

2

6.2

7.7

5

7.4

4

6.5

8.0

8

7.1

5

Mercy Super - Conservative

6.0

57

6.7

6

TASPLAN - OnTrack Maintain

8.9

4

State Super (NSW) SASS - Balanced

7.5

StatewideSuper - Conservative Balanced NGS Super - Balanced SelectingSuper Capital Stable Index

% p.a. Rank

3 years

18.8

BALANCED INVESTMENT OPTIONS

SelectingSuper Balanced Index

1 year

GROWTH INVESTMENT OPTIONS

1

First State Super Employer - Balanced Growth

* SelectingSuper [SS] quality assessment

0.6

Australian Catholic Super Employer - Socially Responsible

27

11.2

1

9.1

1

AustralianSuper Choice Income - Conservative Balanced

9.4

5

8.3

Cbus Super Income Stream - Conservative Growth

9.1

6

8.3

AAA

Energy Super Income Stream - SRI Balanced

9.8

3

22

AAA

TASPLAN Tasplan Pension - Moderate

10.3

2

AAA

UniSuper Pension - Conservative Balanced

6.7

7

AAA

11

6.6

8

5.4

6.1

50

6.6

9

5.9

6

5.9

60

6.5

10

5.6

7

-1.2

2.7

AAA

QSuper Income - QSuper Balanced

8.0

1

AAA

4

AAA

3

AAA

2

7.4

3

AAA

3

7.5

2

AAA

3

8.2

4

5.6

19

AAA

5.0

2

7.6

5

AAA

7.1

8.1

11

7.5

6

6.5

7

AAA

NGS Income Stream - Balanced

6.8

33

7.3

7

6.3

8

AAA

MyLife MyPension - Conservative Balanced

7.2

27

7.2

8

6.9

5

AAA

AAA

Media Super Pension - Moderate Growth

8.4

7

7.2

9

5.5

26

AAA

AAA

StatewideSuper Pension - Conservative Balanced

6.1

62

7.2

10

6.5

6

AAA

13 Not Rated

2.8

SelectingSuper Capital Stable Index

Notes: Please note that all figures reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management and membership fees.

The 2020 ratings are in Are you working with AAA rated super funds?

For more information visit www.selectingsuper.com.au

-1.1

2.8

3.0 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Thank goodness for loo rolls Ben Ong

hey were loathed, yelled at, vilified and even arT rested - but the hordes of panic-buyers and toilet paper hoarders that invaded supermarkets, hardware stores, bottle (liquor) shops, and businesses selling “working from home” wares may have collectively limited the widely-expected March quarter contraction in the Australian economy (at the very least) or saved it from a negative print (at best).

Together, hoarders and panic-buyers sent Australian retail sales to what the Australian Bureau of Statistics (ABS) labelled “unprecedented demand” in March.

Preliminary estimates by the ABS show that retail spending soared by 8.2% in the month of March as “monthly turnover doubled for products such as toilet and tissue paper, and rice and pasta … sales were also strong in retail industries selling items related to home offices”.

This is the strongest monthly jump in retail sales on record that even eclipsed the 8.1% jump recorded in June 2000, as consumers brought forward purchases ahead of the 1 July 2000 introduction of the goods and services tax (GST).

This initial estimate is subject to revision and the final one will be published on 6 May 2020.

But having said that, the final estimate wouldn’t be so far off the ball – February’s preliminary estimate of a 0.4% increase was recalculated to show a 0.5% rise in the final version.

At first glance, the spike in domestic retail spending appears to be counter-intuitive and abnormal given the sharp fall in consumer confidence to a nine-year low in March.

Then again these are abnormal times. Pessimism over disruptions in production and therefore, reduced supply – of toilet papers, grogs, pasta, rice, etc. – prompted panic-buying and hoarding … before they run out.

But having bought so many toilet papers, and pasta and rice and beers, Australian consumers would have much of their essentials taken care of over the coming months, suggesting a sharp decline in retail spending going forward.

This is supported and indicated by the deepening pessimism among consumers. The Westpac-Melbourne Institute index of consumer sentiment plummeted by 17.7% to a reading of 75.6 in April – the biggest monthly decline in the survey’s 47-year history -- from 91.9 in March.

Reserve Bank of Australia (RBA) governor Philip Lowe is equally downtrodden.

In his recent outing (April 21) governor Lowe proclaimed the Australian central bank’s take on the coronavirus’ impact on the domestic economy.

“National output is likely to fall by around 10 per cent over the first half of 2020, with most of this decline taking place in the June quarter.

Total hours worked in Australia are likely to decline by around 20% over the first half of this year.

The unemployment rate is likely to be around 10% by June, although I am hopeful that it might be lower than this if businesses are able to retain their employees on lower hours. The unemployment rate would have been much higher than this without the government’s JobKeeper wage subsidy.

These are all very large numbers and ones that were inconceivable just a few months ago.

They speak to the immense challenge faced by our society to contain the virus.”

True, true.

Then again, the earlier than predicted flattening of Australia’s coronavirus infection curve (to date) could see consumer, business and overall economic activity return to normal sooner than expected. fs

Monthly Indicators

Mar-20

Feb-20

Jan-20

Dec-19 Nov-19

Consumption Retail Sales (%m/m)

8.24

0.45

-0.35

-0.63

1.02

Retail Sales (%y/y)

9.88

1.82

1.99

2.62

3.22

-17.85

-8.22

-12.52

-3.76

-9.75

Sales of New Motor Vehicles (%y/y)

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

5.92

25.63

12.73

28.37

35.35

-10.35

1.21

-1.74

-0.35

-1.64

5.23

5.09

5.29

5.07

5.17

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

-

-0.83

0.42

1.06

5.22

Dwellings approved, Private Sector, (%m/m, sa)

-

19.87

-15.10

4.27

9.93

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

91.94

95.52

93.38

95.10

97.00

AiG Manufacturing PMI Index

53.70

44.30

45.40

48.30

48.10

NAB Business Conditions Index

-21.00

-0.24

1.52

2.87

4.49

NAB Business Confidence Index

-66.00

-2.00

1.00

-3.53

-1.45

Trade Trade Balance (Mil. AUD)

-

4361.00

4745.00

4950.00

Exports (%y/y)

-

-6.86

-1.19

7.35

5.30

Imports (%y/y)

-

-5.61

-1.55

5.54

-2.45

Mar-20

Dec-19

Sep-19

Jun-19

Quarterly Indicators

5590.00

Mar-19

Balance of Payments Current Account Balance (Bil. AUD, sa)

-

0.96

6.50

4.58

-1.88

% of GDP

-

0.19

1.29

0.92

-0.38

Corporate Profits Company Gross Operating Profits (%q/q)

-

-3.45

-0.61

4.46

2.07

Employment Average Weekly Earnings (%y/y)

-

3.24

-

3.02

-

Wages Total All Industries (%q/q, sa)

-

0.53

0.53

0.54

0.54

Wages Total Private Industries (%q/q, sa)

-

0.45

0.92

0.38

0.39

Wages Total Public Industries (%q/q, sa)

-

0.45

0.83

0.46

0.46

Inflation CPI (%y/y) headline

-

1.84

1.67

1.59

1.33

CPI (%y/y) trimmed mean

-

1.60

1.60

1.60

1.50

CPI (%y/y) weighted median

-

1.30

1.30

1.30

1.40

Output

News bites

Eurozone Composite PMI Preliminary estimates show the IHS/Markit Eurozone composite PMI diving to an all-time low of 13.5 in April from 29.7 in March. The drop in manufacturing output to a record-low reading of 18.4 in April (from 38.5 in March) sent the manufacturing PMI down to a reading of 33.6 – its lowest reading in 134 months. Government enforced shutdowns and social isolation measures and limited business operations drove the service sector PMI down to a record low reading of 11.7, more than half the 26.4 recorded in the previous month. According to Markit:“The extent to which the PMI survey has shown business to have collapsed across the eurozone greatly exceeds anything ever seen before in over 20 years of data collection. The ferocity of the slump has also surpassed that thought imaginable by most economists, the headline index falling far below consensus estimates.”

US Composite PMI The IHS/Markit flash US composite PMI output index dropped to a reading of 27.4 in April – “the fastest reduction in private sector output since the series began in late-2009” – from March’s final reading of 40.9, dragged down by significant falls in the manufacturing and services sectors. The manufacturing PMI declined to a a 133-month low reading of 36.9 in April from 48.5 in the previous month as the pandemic prompted cancellations of domestic and foreign orders. The services PMI plummeted to a record low reading of 27.0 from 39.8 in March on the back of the drop in demand following lockdowns and social restrictions imposed by the government to limit the spread of the coronavirus infection.

Japan Composite PMI The au Jibun Bank flash Japan composite PMI dropped to 27.8 in April from 36.2 in the previous month. This is the sharpest fall in the survey’s record that eclipses the declines witnessed during the global financial crisis and the tsunami that hit the country in 2011. Similar to the US and the Eurozone (and perhaps, every other country in the world), measures implemented to lessen the rate of infection has virtually frozen manufacturing and service sector activity in Japan. The manufacturing PMI fell to a reading of 43.7 in April from 44.8 in March. The services PMI slumped to a reading of 22.8 in April – the lowest since records began in September 2007 – from 33.8 in March. fs

Real GDP Growth (%q/q, sa)

-

0.53

0.55

0.60

Real GDP Growth (%y/y, sa)

-

2.19

1.82

1.62

0.50 1.75

Industrial Production (%q/q, sa)

-

1.53

0.48

1.37

0.39

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Financial Indicators

-

24-Apr

-2.79

-0.44

-0.93

-1.76

Month ago 3 months ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.25

0.75

0.75

1.50

1.50

Australian 10Y Government Bond Yield

0.88

0.89

1.09

1.79

2.60

Australian 10Y Corporate Bond Yield

2.17

2.09

1.85

2.60

3.19

Stockmarket All Ordinaries Index

5300.7

11.52%

-26.41%

-18.08%

-10.17%

S&P/ASX 300 Index

5203.3

11.00%

-26.16%

-17.82%

-10.52%

S&P/ASX 200 Index

5242.6

10.70%

-26.06%

-17.85%

-10.72%

S&P/ASX 100 Index

4344.8

10.38%

-26.10%

-17.35%

-10.96%

Small Ordinaries

2236.9

16.47%

-26.71%

-21.64%

-5.92%

Exchange rates A$ trade weighted index

54.70

A$/US$

0.6377 0.5927 0.6828 0.7037 0.7567

57.00

60.30

60.50

66.20

A$/Euro

0.5898 0.5490 0.6193 0.6281 0.6966

A$/Yen

68.51 66.08 74.72 78.64 83.16

Commodity Prices S&P GSCI - commodity index

241.45

270.58

406.27

455.09

381.24

Iron ore

83.98

88.46

94.35

92.95

65.40

Gold WTI oil

1715.90 1605.75 1564.30 1271.65 1269.40 17.18

21.03

54.09

65.96

Source: Rainmaker /

48.90

Sector reviews

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Australian equities

Figure 1: Unemployment rate

Figure 2: Business and consumer confidence

6.1

130

PERCENT

5.9

120

5.7

110

5.5

100

5.3

90

5.1

80

INDEX

CPD Program Instructions NET BALANCE %

50 40 30 20 10 0 -10 -20 -30 -40

Consumer confidence

Prepared by: Rainmaker Information Source: Thompson Reuters /

4.9 2017

2018

2019

2004

2020

-50

Business confidence - RHS

70

2016

2006

2008

2010

2012

2014

2016

2018

-60 2020

-70

Business and consumer confidence and jobs Ben Ong

I

f this is as bad as it gets, give me coronavirus everyday (well, hope not).

The Australian Bureau of Statistics’ (ABS) reported that employment increased (yes, it’s up) by 5900 in March and the unemployment rate ticked up by an itsy-bitsy-teenie-weenie 0.1 percentage point to 5.2% from 5.1% in February.

It’s a beaut! Even prettier when compared with the 701,000 jobs lost in America over the same month that sent its unemployment rate 0.9 percentage point higher to 4.4% in March from 3.5%.

Has Australia again lived up to its tag as ‘The Lucky Country’ and dodged the fallout from COVID-19?

That’s the hope, the wish and the prayer. Unfortunately, this stroke of “luck” resulted from the labour force survey’s timing – it was taken in the first two weeks of March which, according to the ABS, “describes the labour market shortly before the major restrictions in Australia to con-

International equities

tain the spread of the coronavirus (COVID-19)”.

Australia’s Federal and State governments only declared social distancing, lockdowns and other restrictions towards the end of March. As the ABS rightfully declared: “Any impact from the major COVID-19 related actions will be evident in the April data.”

Sit down, fasten your seatbelts and be spooked by the ride. The snaking queue at CentreLink provides a picture (literally) of what we should expect when the next labour market is released.

The lead from the latest NAB Business Survey points to the same thing and as if the virus has eaten the floor from underneath business confidence and condition.

Business confidence plunged to a record low -66 in March from -4 in the previous month.

Business conditions dove to -21 from zero in February.

All the sub-indices plummeted: trading conditions (-19 in March from +4 in February); profit-

Figure 2: S&P 500 & Fed balance sheet

90

3750

INDEX

INDEX

US$ TRILLION

3500

80

3000

60

7.0

S&P 500 index

6.5

US Fed total assets -RHS

6.0

3250

70

5.5

2750

50

2500

5.0

40

2250

4.5

2000

30

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

ability (-27 from -5); employment (-20 from +1).

The drop in forward orders (-29 from -4) indicates that there’ll be more pain to come.

This is compounded by the equally sharp drop in consumer confidence and its implication for consumer spending, and by extension, business conditions and confidence. The Westpac-Melbourne Institute index of consumer sentiment plummeted by 17.7% to a reading of 75.6 in April – the biggest monthly decline in the survey’s 47year history -- from 91.9 in March.

The unemployment expectations index in the survey jumped by 8.2% over the month and by a massive 24.1% over the year to a reading of 158.1 in April.

While the JobSeeker programme is expected to restrain rising unemployment, the government is taking no chances. Prime Minister Morrison is reportedly considering pro-business strategies – tax and industrial relations reform, infrastructure spending, deregulation. fs

Figure 1: CBOE VIX Index

3.5

1500

10

3.0

1250 1000

0 2008

4.0

1750

20

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2011

2.5 2012

2013

2014

2015

2016

2017

2018

2019

2020

Stimulus measures ease extreme fear Ben Ong

T

anking oil prices are the latest go to excuse for the renewed downturn on Wall Street.

But more than this, it’s added to the challenges facing America’s economy and its corporate sector. The US labour market has already deteriorated markedly just weeks into its lockdown – 701,000 workers lost their jobs in March and the unemployment rate jumped by nearly a percentage point to 4.4% from 3.5% in February.

Based on the IMF’s April “World Economic Outlook” report, the worst is yet to come, with the unemployment rate lifting to 10.4% this year and only easing to 9.1% in 2021.

This is affirmed by the continued deterioration in the ISM manufacturing employment index to a reading of 43.8 in March from 46.9 in the previous month; the ISM non-manufacturing employment index to 47 from 55.6 in February; and hiring plans contained in the

NFIB Small Business Optimism Index (which fell by 8.1 points to a reading of 96.4 in March – the largest monthly decline in the survey’s history) dropped by 9%.

And if the present and future job losses are not bad enough, those lucky enough who still have work are limited from spending due to social restriction regulations and business shutdowns.

Not surprising, US retail sales plummeted by 8.7% in the month of March, with consumers only increasing their purchases of “food and beverages” (25.6%) and “health and personal care” (4.3%).

The lead from the University of Michigan’s consumer sentiment survey points to further retrenchment in household spending – the index dropped to a reading of 71 in April – the lowest reading since December 2011 and the biggest monthly fall on record.

Meanwhile, forced factory shutdowns, dis-

29

ruptions to their supply chains and reduced demand sent industrial production plummeting by 5.4% in the month of March – the steepest monthly decline since January 1946.

Still, there’s reason for optimism. The VIX index – the fear gauge – has come down from a record high of 82.69 in March (higher than its GFC peak) to around 45.41 (lower than the Grexit peak).

This is in response to the US government’s fiscal stimulus – worth around 11% of GDP to date – and the Fed’s liquidity enhancing measures, topped by its openended QE programme.

Whether or not these measures are enough remains to be seen but so far so good. The Fed’s balance sheet expansion appears to have put a floor under the S&P 500 index.

The benchmark US equity market index has risen by more than 22% from the three-year low it plumbed on March 23 this year. fs

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

Australian equities CPD Questions 1–3

1. Which survey highlights the adverse impact of the pandemic on Australia? a) Consumer confidence b) Business confidence c) Business conditions d) All of the above 2. Why did Australia’s March employment report come in better than expected? a) Australia has a strong economy b) China’s recent rebound c) The employment survey was taken before the implementation of government restrictions d) Australia is a lucky country 3. The JobSeeker programme is expected to limit the rise in the unemployment rate. a) True b) False

International equities CPD Questions 4–6

4. Based on its April WEO, how high does the IMF predict the US unemployment rate would reach in 2020? a) 3.5% b) 4.4% c) 9.1% d) 10.4% 5. Which indicator showed continued deterioration in the US economy? a) ISM manufacturing index b) ISM non-manufacturing index c) NFIB small business optimism index d) All of the above 6. The VIX index has fallen from the all-time high recorded in March this year. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. What was/were the reason/s behind BOE governor Carney’s optimism in January this year? a) Stabilisation of global growth b) Partial easing of trade tensions c) Receding Brexit uncertainty d) All of the above 8. Which PMI measure dropped to a record low in April? a) Composite PMI b) Manufacturing PMI c) Services PMI d) All of the above 9. BOE policymaker John Vlieghe does not expect a contraction in UK GDP. a) True b) False Alternatives CPD Questions 10–12

10. What was China’s GDP growth rate in the year to the March 2020 quarter? a) 3.5% b) 6.0% c) 0% d) -6.8% 11. Which indicator/s remains in contraction in the year to March? a) Retail sales b) Industrial production c) Fixed asset investment d) All of the above 12. China is Australia’s biggest export market. a) True b) False

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

Fixed interest

All answers can be submitted to our website.

60

PERCENT

3.0

Quarterly change

55

Annual change

50

40

1.5

35

0.5

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

INDEX

45

2.0

1.0

30

Manufacturing

25

Composite Services

20

0.0

15 10

-0.5 2011

2012

2013

2014

2015

2016

2017

2018

2019

JAN17 APR17 JUL17 OCT17 JAN18 APR18 JUL18 OCT18 JAN19 APR19 JUL19 OCT19 JAN20 APR20

2020

COVID-19 makes Brexit seem like heaven Ben Ong

B

ad timing it may be but, it is what it is. The coronavirus pandemic struck just when the dark clouds of Brexit uncertainty lifted over the United Kingdom.

For the best part of three years, Brexit was on every Brits minds – dampening business investment and overall economic activity.

UK annual GDP growth has slowed sharply from 2.1% pre-Brexit to 1.1% as at the end of the December 2019 quarter. But in his last meeting as Bank of England (BOE) governor in January this year, Mark Carney was waxing optimistic.

“The most recent indicators suggest that global growth has stabilised, reflecting the partial easing of trade tensions and the significant loosening of monetary policy by many central banks over the past year. Global business confidence and other manufacturing indicators have generally picked up. Domestically, near-term uncertainties facing businesses and

Alternatives

households have receded. Surveys of business activity have picked up, quite markedly in some cases, and investment intentions appear to have recovered.”

This was underscored by the sharp turnaround in the IHS/CIPS UK Composite PMI index to 53.3 in January – a 16-month high – after four months of below 50 readings (indicating contraction) as activity in both the manufacturing (50.0 from 47.5 in December 2019) and services sectors (53.9 from 50.0) improved substantially.

That was before the coronavirus pandemic hit — and infected even UK Prime Minister Boris Johnson — prompting the government (like most other governments around the world) to issue draconian social distancing and lockdown measures to try and contain the spread of the infection.

Latest stats by worldometers.info put the UK with the sixth highest number of infected cases

Figure 2: FAI & Industrial production

16

25

ANNUAL CHANGE %

14

ANNUAL CHANGE %

ANNUAL CHANGE %

15

20 10

15

10

10

8

5

5

6 4

0

2

-5

0

0

Industrial production -RHS

-15

-4

-5

Fixed asset investment

-10

-2

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

on the planet – 138,078 (as at 23 April) – and the fifth in terms of the death count — 18,738 — suggesting that lockdowns and social restrictions would have to remain in place for longer.

The impact on economic activity is just as bad as the cases of infection and deaths in the country.

The IHS Markit/ CIPS Flash UK Composite PMI dropped to an all-time low reading of 12.9 in April, with the services sector plunging to a record low reading of 12.3 and manufacturing falling also to a record low of 32.9.

This may not be the end of it, for as Markit Economics prints in its latest report, “…the response rate from members of the survey panel was not affected by shutdowns in place due to the COVID-19 outbreak”.

As BOE policymaker John Vlieghe warns, the UK is in for “an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries”. fs

Figure 1: China GDP Growth

12

-10

-20

-6 -8

-15

-25 05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

2014

2015

2016

2017

2018

2019

2020

The great fall of China B

Submit

Figure 2: IHS/CIPS UK PMI

3.5

2.5

Ben Ong

Go to our website to

Figure 1: UK GDP Growth

ack in pre-coronavirus days, the thought that the Chinese economy would slow below the government’s target of around 6.0% was enough to send chills down the spine of many investors and businesses.

If memory serves me right, there were even forecasts that growth would decelerate right down to a 3.5% crawl speed – quickly dismissed because of the widely-acknowledged reality that the Politburo’s growth target is sacrosanct – it has to be met by hook or by crook or by faking … or heads will roll.

Chopped heads would have certainly added to the body count from the infection and deaths wrought by the coronavirus had the pandemic not prompted the powers-that-be into postponing (to later this year) the annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political

Consultative Conference (CPPCC) – scheduled for early March – used as a rubberstamped platform to announce the country’s growth target for the year.

It might be hard to imagine (pre-coronavirus) for the Politburo to target zero growth in the year 2020. But that’s generous compared with the officially reported 6.8% slump in Chinese GDP in the year to the March quarter, not surprisingly due to a near two-month long freezing of all non-essential business activity.

To be sure, the sharp contraction in the economy had already been forewarned by the earlier reported dive in activity indicators: Fixed asset investment dropped by 16.1% in the year to March after plummeting by 24.5 in February; industrial production’s 13.5% dive in Feb was followed by a 1.1% decline in March; and, retail sales slumped by 20.5% and 15.8% (year-on-

year) in February and March, respectively.

We, Australians all, are in for a lot of bother. This is because not only is our numero uno export market is on the ropes (buying 32.7% of our total exports as at 2019), the second – Japan (9%) – third – South Korea (5%) – fourth, fifth and down the line are also in line for contractions in their respective economies.

While the Reserve Bank of Australia and the Federal government’s stimulus measures would help limit the negative flow-on impact on the Australian economy – as they did during the GFC – China’s deep contraction (and its trickle-down effect on the rest of the world, mainly Asia), it would not prevent this lucky country from registering its first recession in 28 years.

China’s slow early return to business as usual offers hope that Australia may be able to again skip a recession … but only just. fs

Sector reviews

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Preston Rowe Paterson & Property Funds Association

he impact of COVID-19 on the commerT cial real estate sector will be profound, particularly managing the investment revaluation process for debt covenant support and financial reporting going forward.

That’s according to a joint paper from Preston Rowe Paterson (PRP) and Property Funds Association (PFA).

The paper said it is almost certain that lenders, regulators and auditors will heighten scrutiny of investment real estate valuations based on the accounting and valuation standards.

“These fair valuation standards weren’t all available during the Global Financial Crisis and will help property navigate the COVID-19 crisis. It’s important we have some uniformity around valuation, which will benefit all in the property investment industry,” PFA chief executive Paul Healy said.

According to the paper, the speed of COVID-19’s impact on the economy, lack of comparable data, and the impact from newly introduced legislation such as the Commonwealth’s Commercial Leasing Code are all key challenges to ensuring accurate property valuations.

Valuation uncertainty lingers over investors Jamie Williamson

“Given the speed with which we have entered into the economic impact of COVID-19…it is likely that there will be a period of time where the market is starved of sale and lease transactions struck after the announcement of the pandemic on 2 March 2020 which would ordinarily allow the direct comparison methodology to apply,” the paper reads.

The code however is expected to have a profound impact on investment real estate cash flows and also the recovery period, which will in turn impact the underlying value of the asset based on pre-COVID-19 cash flows.

“It is obvious that cash flows will be impaired for an uncertain period of time, relative to lease contract cash flows,” the paper said.

The paper states that valuers will need to take a view on the duration of cash flow impacts that comprises both the duration of the pandemic and of the unknown recovery period.

“As cash flows will be reduced for the aggregate of these periods it is likely that values will be less given the discount cash flow time value of money impacts,” it states.

Further, net present values derived from DCF

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analysis are usually apportioned between the net present value of the discounted cash flows for the 10-year holding period and the present value of the terminal value beyond the 10-year holding period.

Typically, the discounting of annual cash flows for the holding period would represent about 40% of the net present value or market value and the remaining 60% is attributed to the discounted terminal value, the paper states.

“At the time of writing, and assuming cash flows return to lease contract cash flows, and underlying market rents are not affected in the medium to long term, it is the 40% representing the discounted cash flows as opposed to the terminal value that will be initially impacted,” it reads.

Valuers must be careful not to unnecessarily double dip any reductions by ensuring cash flows are adjusted properly and capitalisation rates and discount rates aren’t over risk-adjusted, PFA and PRP added.

The time involved in managing the investment is also likely to increase as landlords and tenants undertake complex and detailed negotiations, the bodies said. fs

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14. Which of the following is a key challenge in ensuring accurate property valuations? a) Lack of comparable data b) Impact of newlyintroduced legislation c) Impact of COVID-19 on the economy d) All of the above 15. The same valuation standards that were available during the GFC will be used for the pandemic crisis. a) True b) False

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13. Valuers will need to do which of the following when assessing cash flow impacts? a) Focus on the duration of the pandemic rather than the recovery period b) Focus on the recovery period rather than the duration of the pandemic c) Consider both the duration of the pandemic and the recovery period d) Wait until the recovery period is underway before making any valuations

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Profile

www.financialstandard.com.au 11 May 2020 | Volume 18 Number 09

BIGGEST CHALLENGE YET Having turned his nose up at the idea of working in the super and retirement sector early on, Allianz Retire+ chief executive Matt Rady is now turning his attention to ensuring a higher quality retirement for all. Harrison Worley writes.

llianz Retire+ chief executive Matt Rady AWhich says he doesn’t like to sit still for very long. makes sense for the former Macquarie executive. Life at a place like Macquarie is fast, he says, so to not only survive 18 years, but thrive, one would need to be used to constant change.

But Rady is coping with social distancing just fine, he says.

With his children in their late teens, Rady has been able to make the adjustment from office to home smoothly thanks to the firm’s early adoption of technologies such as Facebook Workplace.

If anything, he’s had more time to get on with the job of changing the way people think about investing in retirement.

Rady, Allianz, PIMCO and his dedicated team believe there is a better way to ensure that retirees live more comfortably in their twilight years.

But it’s taken him time to come to that realisation.

Rady admits superannuation and retirement weren’t areas he had in mind for the most important portion of his career when he started as an accounting graduate at EY’s Adelaide office in 1991, despite the Keating Labor government announcing the introduction of compulsory super in that year’s budget.

“Someone asked me at the time whether I wanted to specialise in super and I said, ‘You’ve got to be joking - I couldn’t think of anything worse,” he laughs.

Little did he know it’s where he’d end up years later, following an interesting journey.

Arriving home from a six month grape-picking sojourn in Vienna after his grade 12 studies at Scotch College, where he rubbed shoulders with and lost debates to the likes of future ALP Senate leader Penny Wong, Rady took on an economics degree at the University of Adelaide.

He describes himself as a“ marginal student at best”, saying he scraped through uni.

“Which is not advice I’d recommend for anyone going through uni - including my own children,” he says.

“But I did as little as possible, and was fortunate again - in a way - that I had the opportunity to do an internship at Ernst and Young at the time, and so I had some job security post-uni.”

He spent three years at EY, and while he says chartered accounting is a great training ground, he “couldn’t get out fast enough”.

“I knew from day one that I never wanted to stay as an accountant. I wanted to be involved in business of some description, and as soon as I qualified with my professional year I jumped ship and went to London with my girlfriend at the time, now wife,” he says.

Throwing himself into the traditional UK experience of young Aussies, Rady worked as a business analyst at Credit Suisse. He says the time was typified by the Michael Lewis classic, Liar’s Poker.

“I just happened to land into this crazy world of bond trading and I knew nothing. I didn’t know what a bond was, I didn’t know what an equity was,” he says.

He embraced the opportunity wholeheartedly, but found himself feeling flat by the end of his two years.

He returned to Australia, landing at Macquarie just prior to its listing.

Taking a back office role, Rady says his job was to help make the firm more efficient to ensure its suitability as a listed entity.

“I must have done an okay job at that because who I was working for - Mary-Anne Terry handed me over to her husband, who was working in what was called - at the time - the financial services group,” he says.

Turning his attention to Macquarie’s cash management trust, Rady began to grasp funds management and retail wealth, which provided him with his first exposure to financial advisers.

When the idea of starting a wrap platform emerged, he was right in the thick of it.

“I was the person in there that basically did that bit of research to kick off Macquarie Wrap and then became a founding member of the team that built that business,” he says.

After about six years working on the wrap business, Rady knew it was time for something new.

“I’m always interested in doing some new stuff,” he said.

“A lot of people might not do this, but for me it was more about ‘I’m going to get bored’, or ‘I’m probably going to get irritable, doing the same thing for too long.’”

His boss at the time dragged him out of the business, and into Macquarie Global Investments, where he was part of a team responsible for creating the Macquarie Professional Series.

Soon, he helped establish Macquarie Agricultural Asset Management, after the firm realised “that agriculture as an asset class was something that should be better than it was”.

“We really felt like there was something more to Australia’s agriculture than tax effectiveness,” he says.

After a bit of research, a business was launched “growing and fattening sheep and cattle”.

“As you can tell, we had no idea what to do other than that it was a good idea. So we went and hired some people that did know what they were doing, and then went and raised $1 billion from around the world to invest in Australian farmland,” Rady says.

Foundation investors included the Bill and Melinda Gates Foundation, no less.

Rady refers to Macquarie as “the third school”.

“And it was probably the most important, certainly from a business perspective,” he says.

According to Rady, the firm gave him both the opportunity to back himself, and “enough rope to hang yourself”.

“But if you’re onto something, they also gave you enough rope to make it happen,” he says.

Reflecting, he says his career journey suggests he is not “a specialist in anything”.

“But I do like doing new stuff, and I do like getting stuff done. And I don’t sit still for very long,” he says.

“So if there’s an opportunity to do something where we think there’s a really strong social cause or a really strong

Innovating in retirement is bloody hard. And you don’t realise just how ingrained the culture of investing really is until you try and change it.

Matt Rady

proposition for investors, well then let’s see if we can make it happen.”

Like trying to help Australians live a better life in retirement.

Despite the challenges he experienced at Macquarie, or even his time at Iress or online trading solution Stake, Rady says it’s clear - Allianz Retire+ is his “biggest challenge yet”.

“And I say that because innovating in retirement is bloody hard. And you don’t realise just how ingrained the culture of investing really is until you try and change it,” he says.

The firm’s current mission is to try and change the way people think about retirement, overturning decades and decades of social and cultural expectations.

He says that to get the answers to the most typical retirement questions, like what a super balance really means, he has to change the way people think.

“And that’s actually a hard thing to do,” he notes.

He says the patience of parent company Allianz is fortunate.

“The reason why it’s different for me is it’s not only the biggest challenge I think I’ve accepted in my career so far, but it’s the one with the most social purpose,” he says.

While things he’s done in the past were great, the world’s not a different place because they exist, he says.

“But the world can be different, if we get this right. We can make a genuine and fundamental difference to the retirement landscape in Australia if we can get this business right,” he says.

“And that’s what’s exciting to me.” fs

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